Are We on the Verge of a Santa Claus Rally?
With the markets taking a bit of a breather this week due to the US Thanksgiving holiday, it’s time to assess where exactly we are on the bear market timeline. Recently, I wrote about the possibility that we hit bottom over the past few weeks. The markets have been flat since the significant surge following the inflation figures finally plateauing in October. With the expectations that the Federal Reserve will be issuing a smaller rate hike in December, could things be aligning for a Santa Claus rally this year?
No, I did not make that up. A Santa Claus rally has historically seen greener performance from the S&P 500 in the weeks leading up to Christmas and the New Year. There are some theories as to why this has been the case including festive spirits, end-of-the-year bonuses, and even hedge fund manager vacations. For whatever reason, investors like to send the markets higher into the end of the year. Will that be the case this year? That remains to be seen.
The lower rate hike could show that the Fed finally believes that inflation in the US economy is calming down. On top of that, major corporations are cutting staff and trying to re-strengthen their balance sheets. Whether these are just temporary layoffs or permanent, we could finally be seeing a slowdown in the labor market.
A December Rally Could be on its Way
Sure, stocks could rally for the month, especially as investors celebrate what appears to be the peak of post-COVID US inflation. But could this Santa Claus Rally still be a bear market rally? Absolutely. There are many analysts who believe that we are establishing a bottom, but they are also warning investors that this does not mean a return to a bull market.
While the markets have bounced after hitting their low point of the year in October, it’s hard to feel optimistic yet. With every rally this year has come a jarring fall back to Earth, and for those of you who have not experienced a bear market before, this is completely normal. Stocks expanded for more than a decade following the Global Financial Crisis, and are now contracting back to more reasonable price multiples. This, of course, has been accompanied by pain for investors who did so well during the bull market in 2020.
So this Thanksgiving weekend, let’s count our blessings. Sure stock prices are down but things could certainly be worse. Other parts of the world deal with far worse things than stock prices on a daily basis. We might recover some in December but do not get caught in the euphoria of what could end up being another bear market bounce. Nobody knows when this will end, but it’s likely to spill over into 2023. Enjoy any gains you make over the next few weeks, but prepare for more pain once the calendar turns over.
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