Market: Should investors believe in Santa’s rally in 2022?

(BFM Bourse) – Between high inflation, the war in Ukraine and an impending recession, the stock markets suffered especially in 2022. In this context, investors are hoping for an increase in the markets at the foot of the Christmas tree. This phenomenon of the “Christmas meeting” has been highlighted for several decades – but be careful not to take an allegory for a certainty.

The traditional colors at the end of the year are green and red. As in the stock market. And so far, global indices are dressed in red – just like Santa Claus – as December is statistically one of the best months of the year for stock markets.

But the central banks have decided otherwise and have not given gifts to the markets in recent weeks. The restrictive rhetoric from the European Central Bank and the Federal Reserve about their fight against inflation sent stock market indices reeling. Over the last month of the year, the CAC 40 is currently down 3.27%, the Dow Jones is off 4.5%, with the S&P 500 down 6.3% and the Nasdaq down 8.65% (performance as of December 22 at the closure). So in this volatile environment, were traders smart enough to receive capital gains as Christmas gifts?

What is the Santa Claus Rally?

Numerous studies have shown that the winter period is historically more conducive than summer for an increase in the indices (Halloween/sell in May effect). And the last month of the year stands out in particular: this is called the Christmas rally (in English Christmas Rally).

As early as the 1970s, the prominence of the month of December was popularized by the “Trader’s Almanac” (Stock Trader’s Almanac, one of the first publications to focus on highlighting the various seasonal cycles of the stock market). The almanac, created by Yale Hirsch and edited today by his son Jeffrey, even highlighted the Santa Claus Rally (the Santa Claus Rally, which focuses more specifically on the period of the last five sessions of the year and the first two of the new year).

There is no single reason for this runaway market, notes broker Degiro. This festive mood in the stock markets would be linked to the holiday spirit, which “breeds the optimism” of operators at this time of year. With their year-end bonuses in their pockets, investors would also be more inclined to trade the financial markets. “During this period, institutional investors are on vacation, which gives more influence to individuals, who tend to be more bullish,” adds Degiro.

“Fund managers, who represent a large part of the shareholder base, are rebalancing their portfolios before the end of the year” (“window dressing”) to try to show as much as possible lines of added value among their main positions,” noted David Brett, a former trader at the time financial journalist, now columnist at Schroders.

Santa Claus or bogeyman?

“If the month of December was bad, it often portends a bad year on the stock market. This was the case in 1956, 1965, 1968, 1978, 1980 and 1982 on the Dow Jones,” recalls Christian Fontaine, deputy editor-in-chief at house of Income on air by BFM Business. The history of the stock market records this or that trend in the markets. But be careful not to take at face value that October months are bad, or that it is better to offload your positions in May and do nothing before November, according to the saying “Sell in May and walk away”.

“Past performance is not an indication of current performance and stock market superstition is only real until disproved,” warns David Brett. Moreover, the rally effect at the end of the year will soon give way to another somewhat less known stock market belief: the January effect, after which stock markets rise more in January than in other months of the year, driven in particular by the operators’ appetite for “small caps”.

Sabrina Sadgui – ©2022 BFM Bourse

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