The Santa Claus Rally Ends on the Naughty List

Adam Turnquist | Chief Technical Strategist

Last Updated:

Additional content provided by Colby Hesson, Analyst.

Yesterday marked the end of the historically strong seasonal period called the Santa Claus Rally, technically classified as the last five trading days of the year plus the first two trading days of the new year. Since 1950, the S&P 500 has generated an above-average 1.3% return during this short seven-day window, but this time the S&P 500 fell -1.1%. This is the 16th time since 1950 that the S&P 500 closed lower during this period, snapping a seven-year streak of positive returns during the Santa Claus Rally. Now that the streak is over, the market is on the naughty list, with the S&P 500 historically generating an average annual return of only 4.1% when Santa doesn't show up.

Returns during the Santa Claus Rally period have historically correlated well with January and subsequent year returns, which may not bode well for investors this year. According to the data below, when Santa is a no show, the S&P 500 slightly underperforms in January, on average, and ends the month in the red 60% of the time. Furthermore, full-year returns have been underwhelming when considering the S&P 500’s average annual return since 1950 is 9.3%.

Santa No Shows

 

Average

Median

% Positive

January Return

-0.3%

-1.8%

40.0%

Next Year Return

4.1%

3.0%

66.7%

Source: LPL Research, Bloomberg 01/03/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.
The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

Santa does make mistakes from time to time, and the market can still wind up with an attractive return over the following year. For example, 20% of the positive returns in January following a negative Santa Claus Rally were greater than 5%, while 20% of the positive returns by year end were also greater than 20%. While we may not be in for another 20% plus year like 2023, momentum into the new year does suggest we could experience another solid year. Historically, when the S&P 500 returns 20% or more during a calendar year, the index gains an average of 9.6% the following year. There is still a long 12 months ahead for the equity market to go in either direction.

Conclusion

While negative Santa Claus rally periods have traditionally signaled poor market performance the following year, LPL Research believes there are plenty of catalysts for the market to offset potentially weak seasonality. In 2024, equities should benefit from falling inflation and interest rates, the conclusion of the Federal Reserve's rate-hiking campaign and improved corporate profitability. We remain neutral on equities, sourcing the slight fixed income overweight from cash relative to appropriate benchmarks.

Finally, the Santa Claus Rally period is only one piece of the seasonality puzzle, so watch for additional updates from LPL Research on the first five days of January indicator and the January Barometer as we progress through the month.

For more details on LPL Research’s outlook for the markets and economy in 2024, please refer to Outlook 2024: A Turning Point.

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Adam Turnquist

Adam Turnquist oversees the management and development of technical research at LPL Financial. His investment career spans over 15 years.