The “Santa Clause Rally” is a stock market phenomenon first discovered by Yale Hirsh of the Stock Trader’s Almanac in 1972. Yale noticed the stock market often yields positive returns during the last five trading days of December and the first two trading days of the new year. Market technicians have since recognized the arrival of this “rally” often sets the tone for the rest of year, so this sits atop of my “adult” Christmas Wish List…
Another exciting stock market phenomenon is the aforementioned 12 months following the midterm election day’s rich history of gains. Historically, the stock market has been positive in the twelve months following a midterm election 18 out of the last 18 times. That is not a typo! 72 years of a perfect historical record and the average gain has not been too bad either at +32% from the midterm bottom! I like those odds.
The stock and bond markets have had a rough year. In my last newsletter near the end of September, I wrote:
Three weeks after writing that, it happened… Bad news became good news, and the markets found a bottom near the 3500 level on the S&P 500. That mid-October low was enough to take back exactly half of the gains made from the COVID lows to the recent high, a very significant technical level I wished to hold.
Since then, the markets have rallied some 15% higher as we continue to see improvement in the trend of inflation. Investors now expect the Fed to, at least, slow down the pace of their uber aggressive financial tightening policies. Furthermore, the economy has remained resilient and has resumed expanding after taking a 6 month pause earlier this year. Has the Fed actually pulled off a soft landing? It’s looking good at this point!
Further evidence that investors may believe the Fed has got it under control can be seen by the fact that the US dollar peaked in late September followed by 10-year Treasury yields in October. Both have retreated since with notable moves: The dollar has come down 10% which will dramatically help earnings (and those of you with foreign pensions!) while the longer term 10-year Treasury yields have receded to around 3.5% from their recent high of around 4.3%. This implies investors do not expect high levels of inflation to stick around for long or they would demand a higher return to be compensated for future price increases.
Industrial metals prices have gained some ground recently and appear to have formed a base while oil prices have come down. The consumer has been spending, earnings have been nowhere near as bad as feared, sentiment is generally improving, and the Feds most recent actions appear to be well accepted amongst investors. The whole tone of things just feels different than it did a couple months ago.
Charts of interest:
- Since peaking in January, a downtrend line has formed on the S&P 500 price chart and has acted like a barrier. Recent price action is once again testing this trendline.
- 50% pullback to the 3500 level.
- Recent price action broke the downtrend line but has yet to hold above
- No doubt about it, interest rates have been trending up.
- The recent pullback has brought rates back to where they were in June
- Can they stabilize in this area?
- All things being equal, as yields rise, Bond prices fall
- Bond investors have certainly felt the pinch this year
- Have bonds prices finally turned the corner?
- Upward pressure on the US Dollar has finally given way as the uptrend has been broken
- The Dollar Index below 105 is a healthy sign for earnings and trade in my opinion
- The volatility in our currency this year is unprecedented
- Industrial metals appear to be forming a large base after a precipitous decline
- Are the metals telegraphing the economy has stopped contracting?
Back in October, we began adding back some risk to our managed portfolios as technical levels were respected and the rhetoric appeared to be changing. The markets have since rewarded us for doing so for the following reasons:
- Inflation data and Fed speak have been showing signs of turning the corner more in favor of the markets.
- Equity markets had become “oversold” from a fundamental perspective.
- Prime Minister Truss resigned effectively removing her radical idea of further stimulus (and inflation) and the Bank of England regained control of their monetary policy.
- The war in Ukraine has not escalated and there are some signs of Russian retreat.
- China ramped up its zero COVID policy (which pressures the global economy and supply chain) but has recently begun to relax said policies.
- Seasonal tendencies- October marks the end of the “worst six months” of the year historically and sets the stage for the best months of the year.
I’m cautiously optimistic heading into the year end and new year. We still have a way to go combating inflation and the Fed has a history of going too far with their policies and inducing recessions. Recent rhetoric shows the current Fed recognizes this and there remains a strong chance they get it right this time. I learned a long time ago not to fight the Fed. We remain defensive overall and still have a cash cushion but have moved a small portion of our allocations towards growth back in October. As the data comes in, we will continue to make the changes we see necessary to protect and grow our portfolios. For now, we are very happy to have the recent rally in both the stock and bond markets and hope Santa will come and carry us higher…
We’d like to wish you all the best this season has to offer! Should you wish to discuss the current markets, our strategy, or just touch base to see how things are going, please don’t hesitate to reach out to our office @ 843-651-2030. Also, feel free to share these newsletters with your friends and family via email and visit us on our website at www.sabowealth.com or www.facebook.com/sabowealth.
Important Disclosures: Past performance is not a guarantee of future results. The statements contained herein are solely based upon the opinions of Edward J. Sabo and the data available at the time of publication of this report, and there is no assurance that any predicted or implied results will actually occur. Information was obtained from third-party sources, which are believed to be reliable, but are not guaranteed as to their accuracy or completeness.