Is the Santa Rally Coming to Town?

Market sentiment was dampened last week due to uncertainty over whether there would be additional fiscal stimulus and also soaring COVID-19 cases globally. The US’ S&P 500 index was -0.96% last week and +13.39% year to date. European stocks had it worse with the Euro Stoxx 50 index -1.51% last week and -6.92% in 2020. Hong Kong stocks followed suit -1.23% last week.

AQUMON’s diversified ETF portfolios were +0.03% (defensive) to -0.56% (aggressive) last week and +2.46% (defensive) to +11.34% (aggressive) year to date. AQUMON’s SmartGlobal HK ETF portfolio, with more regional exposure to Hong Kong/China, was +1.30% (defensive) to +13.81% (aggressive) year to date. Across the board most risk assets were down about -1% but Chinese a-shares was the biggest lagger at -4.53%. Hong Kong tech stocks in comparison were +1.39% last week. 

With a number of investors asking us what they should do now (profit take or invest more) we thought we’d let the real numbers do the talking. With Christmas right around the corner we think it would be fun to stay festive during this week’s Market Insights. So this Christmas when you hear the song “Santa Claus Is Coming To Town” as an investor maybe you should be asking...is the Santa Claus (Rally) really coming to town this year? Read more to find out.

Traditionally speaking December is a strong month for stocks

Before we jump into the Santa (Claus) Rally let’s first look at the historical returns for the S&P 500 for the month of December first. This is known to investors as the December Effect. If we look back at past 70 years (since 1950) the average monthly returns of the S&P 500 in the month of December was +1.43% which is about +0.76% higher than the average monthly return if we take into account all of the months:  

 When we look closer at the returns historically in December, beyond just higher average returns, the amount of ‘up months’ (where monthly returns were positive) are also abnormally higher at 74.29% of time since 1950 (versus 60.05% of the the time if we include all months):

 So statistically speaking, it pays to stay invested over the winter months into the new year. 

So what is this Santa (Claus) Rally we mentioned earlier? The Santa Rally takes the December Effect one step further by delivering similarly positive returns during the last 5 trading days of the year (right around Christmas) into the first 2 trading days of January. So that’s 7 trading days in total. 

So how well has the Santa Rally done?

Statistically speaking in the past 70 years of the S&P 500 index’s history, the Santa Rally has average returns of +1.33% in just 7 short trading days and has delivered positive returns 79% of the time. So how would people explain the reason being this stock phenomenon? There are a few theories by industry experts:

Turn of the month effect: Researchers have suggested this is similar to a ‘turn of the month’ effect whereby there is a temporary increase in stock prices during the last few days and the first few days of each month. Analysts reason this takes place because distributions from pension funds and other retirement accounts happen during this period and their proceeds get immediately reinvested into the stock market thereby driving markets higher. 

Retail investors replacing institutional investors: Other analysts have suggested that during the end of the year institutional investors who in general are viewed as more sophisticated and contrarian use this period to close their investment positions and head on vacation (unlikely this year due to COVID-19). The gap in the market they create is replaced by retail investors who in general are more bullish in nature. This is similar in a way to what we saw this year after the market selloff in February/March whereby many institutional investors remained on the sidelines (by not investing) while retail investors were scrambling to invest in the stock market and was a sizable part of the reason why financial markets rebounded so strongly after late March.

But to be completely transparent, since 2010 maybe investors have been more naughty than nice so the Santa Rally has been rather muted only offering +0.40% on average in the past decade (versus +1.43% on average in the past 70 years):

This doesn’t necessarily mean that now is not a good time to invest, but in the context of the Santa Rally, we’d believe that Santa may have come in a little earlier than normal this year since as of December 17th the S&P 500 index is already up +2.78% this month and +13.84% since November. Given the recent run up in both more cyclical value stocks and growth stocks we’d be a little more cautious heading into the holidays this year. Although US value is still underperforming growth stocks year to date by +33.15%, in the month of December value stocks has turned the tables and is outperforming growth by +4.34%:

Particularly if there is a pullback, we’d continue to be carefully buying as we’re positive on the outlook for financial markets in 2021. 

So given Santa may have come earlier this year we still wanted to make sure everyone’s leave with a few nice Christmas ‘gift’ takeaways in terms of things that can help our investment portfolios when looking ahead:

1) Short term market catalysts

Even though the passing of the US stimulus bill looks like it could see delays, bi-partisan US politicians are scrambling to work out a swift solution. If the bill does pass it probably will include a US$600 (~HK$4652) stimulus check which will likely be invested into the market similar to what we saw earlier this year by US retail investors. As we mentioned multiple times to our readers, ‘follow the cash’.Liquidity is king (or queen) so we could see this push up markets if passed.

2) Medium term market catalysts

Beyond the positive vaccine news lately which will continue to be key to reopening our economies, market fundamentals we are closely watching is corporate earnings. After a year of depressed earnings we feel that a vaccine lead recovery in the first half of 2021 could easily drive up corporate earnings per share (EPS) growth by +15-20%. Translation? If earnings surprise on the upside in that magnitude we would not be surprised to see another 5-10% upside for the S&P 500 index. 

3) Don’t forget to protect your portfolios

Even though we are positive on markets ahead, it will likely not be a smooth ride for Santa, his presents and all of us sitting in the sleigh with him heading into 2021. So our basic jobs as investors is always to carefully protect our portfolios by reassessing the investments that have done well or poorly so far, rebalance if necessary and potentially hold a little more cash in 2021 for protection purposes. Use your time off this holiday season to wisely review your investment portfolio. 

We from AQUMON want to wish all investors Happy Holidays and a very Merry Christmas!

If you have any questions, please don’t hesitate to reach out to us at AQUMON. We’re always happy to help. Thank you again for your continued support for AQUMON. Stay safe outside and happy investing!

 Ken

About us

As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.

AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.

AQUMON’s major investors include the HKUST, Cyberport, Alibaba Entrepreneurs Fund and the Bank of China International's affiliate.

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