The first indicator to register a reading in January is the Santa Claus Rally created by Yale Hirsch in 1972. The seven-trading day period begins today December 27 and ends with the close of trading on January 4. Normally, the S&P 500 posts an average gain of 1.3%. The failure of stocks to rally during this time has tended to precede bear markets or times when stocks could be purchased at lower prices later in the year. As the late, great Yale Hirsch’s famous line states, “If Santa Claus should fail to call, bears may come to Broad and Wall.”
We are bullish for yearend 2021, but the market faces several obstacles for next year. Valuations are rich and year-over-year economic and corporate comparisons will be nowhere near as easy as this year versus the 2020 pandemic numbers. While the Fed has promised patience and a slow pace it is now rather clear that they will be making a concerted effort to remove quantitative easing by mid-year and begin slowly raising rates. Plus it promises to be a contentious midterm election year and the battle against Covid-19 may linger.
The results of the Santa Claus Rally along with the other two components of our “January Indicator Trifecta,” the first five days of January and the full month January Barometer (also created by Yale Hirsch in 1972) will help solidify our outlook for next year.
When all three are up the S&P 500 has been up 90% of the time, 28 of 31 years, with an average gain of 17.5%. When any of them are down the year’s results are reduced and when all three are down the S&P was down 3 of 8 years with an average loss of -3.6% with bear markets in 1969 (-11.4%), 2000 (-10.1%) and 2008 (-38.5%), flat years in 1956 (2.6%), 1978 (1.1%) and 2005 (3.0%). Down Trifecta’s were followed by gains in 1982 (14.8%) and 2016 (9.5%).