Santa Claus passed by the stock market in 2011.
While the official definition of the Santa Claus Rally is subject to debate, it is most commonly a reference to the strong stock market performance that often occurs during the week between Christmas and New Year's Day.
In most years, investors receive a generous gift in their stock market stocking. Since 1928, stocks have posted an average return of +0.89% during the period between Christmas and the end of the year. This includes gains in 61 out of the last 84 years, or 73% of the time. And while the stock market has declined 23 times during this stretch, its worth noting that in nearly one-half of these instances the declines were very modest at less than -0.40%. In only 13 out of the last 84 years, stocks have declined by -0.40% or more during this Santa Claus period. Notably, 2011 was one of those rare years, as stocks declined by -0.61% as measured by the S&P 500 Index.
So what might the disappointing Santa Claus period in 2011 signal for stocks as we enter the New Year? If history is any guide, it suggests we may be headed for a challenging January 2012.
History suggests that further volatility is most likely in the coming month. The stock market posted an absolute move up or down of 3% or more in 7 out of the past 12 Januarys following a particularly weak Santa Claus period. And two of the remaining months saw absolute moves of 2% or more. Thus, a sharp stock market move is likely under this premise in the coming month. Of course, the key question in this regard is whether this volatile move is more likely to be up or down.
History indicates that 2011's weak Santa Claus period may be signaling a sharp down move for stocks in January 2012. Of the 12 past instances, six occurred during secular bull markets (1946-1968, 1982-2000) and six occurred during secular bear markets (1929-1946, 1968-1982, 2000-Present).
In the six years where Santa Claus went missing during secular bull markets, investors were handsomely rewarded come January, as the stock market exploded higher in all six instances posting an average monthly gain of +5.86%. Thus, post Christmas weakness during periods of relative market calm and optimism often represented attractive pullbacks to aggressively add to equity positions in the New Year.
Virtually the opposite has been true during secular bear markets. In the six years where the market meaningfully declined during the Santa Claus period in secular bear markets, the stock market moved sharply lower in the following January in four out of the six past instances. And one of those two positives was a marginal +0.84% advance in January 1938 following what was by far the worst Santa Claus period ever with a -5.11% decline to close out 1937. Four of the remaining instances have occurred in the current secular bear market that started in 2000. Only in 2006 did the stock market manage to rise following a poor Santa Claus period to close out 2005. In the other three instances, the stock market declined by an average of -4.20% in the following January. Thus, a poor Santa Claus showing during periods of heightened stress and volatility in investment markets signal that more significant challenges may lay ahead once the New Year gets underway.
Therefore, the weak Santa Claus period to close out 2011 likely signals two things for January 2012. First, that volatility is likely to remain heightened in the coming month. Also, that pressure to the stock market may be sharply to the downside if history is any guide.
Given this and other stock market warning signals as we head into the New Year, now may be the time to exercise caution in investment portfolios. Stock allocations should be managed carefully and may be well served to emphasis more defensive positions in the consumer staples (XLP) and utilities (XLU) space. And specific names such as Kellogg's (K), H.J. Heinz (HNZ) and Atmos Energy (ATO) may be poised to hold up better than the broader market due to their high quality defensive characteristics. Various allocations should also be rewarded if stocks continue to move to the downside. These include safe haven positions such as agency MBS (MBB) and utilities preferred stocks. Gold (GLD) and silver (SLV) are also looking increasingly interesting as potential safe havens that, like agency MBS, stand to benefit from any further aggressive monetary easing from global central banks. Both gold and silver have seen their prices come off dramatically in recent weeks.
While this movement may foreshadow potential trouble ahead for the stock market, a good portion of the downside may now be factored in for these precious metals.
Disclosure: I am long GLD, SLV, XLU, K, HNZ, ATO, MBB.
This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.
