As traders return from the holiday-shortened week, the price action heading into the new year will be closely monitored — especially given the relatively light economic data and earnings calendar for the coming days.
The S&P 500 (^GSPC) is entering the period known for ushering in the so-called Santa Claus Rally, or seasonally strong timeframe for stocks at the end of each year.
The term, coined by Stock Trader's Almanac in the 1970s, encompasses the final five trading days of the year and first two sessions of the new year. This year, that Santa Claus Rally window is set to start on Monday, Dec. 27 — or the latest a Santa Claus rally has started in 11 years, due to the timing of the holidays this year.
According to data from LPL Financial, the Santa Claus Rally period encapsulates the seven days most likely to be higher in any given year. Since 1950, the Santa Claus Rally period has produced a positive return for the S&P 500 78.9% of the time, with an average return of 1.33%.
“Why are these seven days so strong?” wrote Ryan Detrick, LPL Financial chief market strategist, in a note. “Whether optimism over a coming new year, holiday spending, traders on vacation, institutions squaring up their books — or the holiday spirit — the bottom line is that bulls tend to believe in Santa.”
And if history is any indication, the absence of a Santa Claus Rally has also typically served as a harbinger of lower near-term returns.
"Going back to the mid-1990s, there have been only six times Santa failed to show in December. January was lower five of those six times, and the full year had a solid gain only once (in 2016, but a mini-bear market early in the year)," Detrick added.
“Considering the bear markets of 2000 and 2008 both took place after one of the rare instances that Santa failed to show makes believers out of us," he said. A bear market typically refers to when stocks drop at least 20% from recent record highs. "Should this seasonally strong period miss the mark, it could be a warning sign."
And this year, investors do have considerable additional concerns to mull heading into the new year. Though stocks closed out Thursday's session at fresh record highs before the long holiday weekend, December still marked a volatile month to start, with renewed concerns over the Omicron variant and the potential for tighter monetary policy from the Federal Reserve weighing on risk assets. Plus, prospects for more near-term fiscal support via the Biden administration's Build Back Better bill have dwindled, and inflation concerns spiked further. Last week, the Bureau of Economic Analysis reported core personal consumption expenditures (PCE) — the Fed's preferred inflation gauge — rose at a 4.7% year-over-year clip, or the fastest since 1983.
"If the U.S. was not battling the Omicron variant, U.S. stocks would be dancing higher as the Santa Claus Rally would have kept the climb going into uncharted territory," Edward Moya, chief market strategist at OANDA, wrote in a note last week. "It is too early to say for sure if we will get a Santa Claus Rally, but given all the short-term risks of Fed tightening, Chinese weakness, fiscal support uncertainty and COVID, Wall Street is not complaining."
Economic calendar
Monday: Dallas Federal Reserve Manufacturing Activity Index, Dec. (13.0 expected, 11.8 in November)
Tuesday: FHFA House Price Index, month-over-month, October (0.9% in September); S&P CoreLogic Case-Shiller 20 City Composite Index, month-over-month, October (0.9% expected, 0.96% in September); S&P CoreLogic Case-Shiller 20 City Composite Index, year-over-year, October (18.6%. expected, 19.05% in September); S&P CoreLogic Case-Shiller Home Price Index, year-over-year, November (19.51% in October); Richmond Fed Manufacturing Index, December (11 expected,11 in November)
Wednesday: Wholesale Inventories, month-over-month, November preliminary (1.7% expected, 2.3% in October); Advance Goods Trade Balance, November (-$89.0 billion expected, -$82.9 billion in October); Retail Inventories, month-over-month, November (0.5% expected, 0.1% in October); Pending Home Sales, month-over-month, November (0.5% expected, 7.5% in October)
Thursday: Initial jobless claims, week ended Dec. 25. (205,000 during prior week); Continuing claims, week ended Dec. 18 (1.859 million during prior week); MNI Chicago PMI, December (62.2 expected, 61.8 in November)
Friday: No notable reports scheduled for release
Earnings calendar
Monday: No notable reports scheduled for release
Tuesday: No notable reports scheduled for release
Wednesday: FuelCell Energy Inc. (FCEL) before market open
Thursday: No notable reports scheduled for release
Friday: No notable reports scheduled for release