Is Santa Coming to Town?

In a little more than eight days, Santa will zip around the world at speeds defying space and time, delivering presents to the world’s boys and girls. According to market lore, he’s also supposed to put some nice gains in investors’ stockings—the Santa Claus Rally. Yet investors are mixed on what to expect from Santa this year. Some fret the mid-month pullback means Santa won’t deliver. Others still believe in the so-called Christmas miracle. In our view, it’s impossible to say whether Santa will deem investors naughty or nice—short-term market moves are impossible to predict. But one thing we do know: Whether stocks have a good December or not doesn’t much matter for long-term investors—longer-term trends matter far more, and stocks look set to do well over the foreseeable future.

The Santa Claus Rally is a lot like Santa—fake. It’s true December has the S&P 500’s second-highest average monthly return since 1926, and some believe it’s because Christmas cheer makes markets skyrocket from Christmas to New Year’s, give or take a couple days. One recent analysis finds the Dow has risen 79% over the last five days of December, averaging a 1.2% gain, with stocks up 10 of the last 12 Decembers. Santa, sprinkling good tidings on the portfolios of investors worldwide! Except it’s really just five days of returns from a poorly constructed index (the Dow) and only 12 years of history. An interesting observation with no predictive power—rather like all seasonal myths.

The myths don’t stop with Santa. With a quick Google search, you’ll find all sorts. Followers adhering to all of them may have a very odd journey indeed. Next month, we’ll experience the so-called January Effect—where January’s returns will supposedly foretell the year’s course. No discernable pattern really exists, except that stocks rise in about 70% of years since 1926, but many await the signal, and if you followed it to the letter, you’d likely begin the year out of stocks, then buy in February if stocks rose. Then, in three months, you’d sell in May and go away. When you buy back in then is anyone’s guess. Some say September, others October and still others November—after all, September and October, some say, are financial hurricane season—the season of crashes. Still others suggest navigating the high holidays—sell on Rosh Hashanah, buy on Yom Kippur. Finally, in Asia some believe the Indian holiday Diwali—in November—is bullish. That brings us back to the Santa Claus rally. Tiring! And following these patterns likely gives investors no advantage—we see plenty of good Mays and Septembers and bad Decembers. The only thing you’re guaranteed to accumulate by following seasonal adages is trading costs.

For most equity investors with long-term goals and objectives, one month’s performance shouldn’t much matter. That’s true whether you’re sure markets will bring you tidings of great joy this month or you don’t expect a rally with all the bells and whistles in light of recent volatility. Longer-term trends matter much more. Regardless of how December goes, the future looks good. US firms are in great shape—balance sheets are flush with cash, and earnings, revenues and capex are on the rise, which all augur well for continued growth. Most Leading Economic Indexes are rising, suggesting global growth continues—and could pick up. The UK recovery is heating up, the eurozone continues improving, and Emerging Markets should gain steam as yield curve spreads continue widening. Politically, the landscape is calm, with gridlock in the world’s freest markets, limiting legislative risk. And sentiment is still guarded—positive developments continue catching folks off guard.

Seasonal myths are simply oversimplifications of a handful of past returns—past performance doesn’t dictate future returns. Forward-looking fundamentals do, and fundamentals today suggest stocks should rise over the foreseeable future regardless of whether Santa brings investors toys and treats or lumps of coal.