EQM Capital Weekly Market Recap 12/26/14 – A Santa Claus Rally

Posted on Dec 27, 2014


 “If Santa Claus should fail to call, bears may come to Broad and Wall.” – Stock Trader’s Almanac

Stocks extend their holiday cheer

U.S. stocks continued to rally this week on lighter than average volume, posting their biggest gain in three years.  The S&P 500 and Dow both closed the week at record highs, as did the Russell 2000 Index of small cap companies.  The tech-heavy NASDAQ hit its highest level since March 2000.  Small caps in particular have staged an impressive end of year rally, surging 16% since experiencing their one-year low on October 13th.

Conditions favoring small caps

Small cap stocks have lagged this year, but with the domestic economy on a roll they are starting to gain investor favor.  The Russell 2000’s year-to-date gain of 4.4% is still about a third of the S&P 500’s advance this year.  With Q3 GDP coming in at an annual rate of 5%, small cap companies stand to benefit the most from robust economic growth.  Several key factors favor small caps going forward:

  • Lower gas prices – As small caps generate most of their revenue domestically, low gas prices could provide a nice boost in U.S. spending.
  • Strong dollar – Small caps are less exposed to a strong dollar, which could weigh on large cap multinationals.
  • Slowing global growth – Slower growth in China and Europe negatively impacts large cap U.S. exporters.
  • January Effect – Investors may also be betting on the so-called “January Effect” to create a seasonal tailwind as investors dump year-end losers to claim tax losses, only to repurchase those names back in January.

Santa Claus Rally

The phrase Santa Claus Rally, also known as the “December Effect”, was first described by Yale Hirsch in his Stock Trader’s Almanac in 1972.  It refers to the seasonal rise of stock prices in the month of December, generally seen over the final week of trading prior to the new year.  The rally is likely attributable to multiple factors including the previously mentioned “January Effect”, the injection of additional funds into the market due to tax-loss selling, general holiday optimism, and fund manager year-end “window dressing”.  According to the 2015 Stock Trader’s Almanac, since 1969 the Santa Claus rally has resulted in positive returns 34 out 44 past holiday seasons, generating an average cumulative return of 1.6%.  Historical data on the Dow dating back to 1896 confirms these results, with the Index rising 77% of the time.

U.S. Stocks1
Index Friday’s Close Week’s Change % Change
DJIA 18053.71 248.91 8.91%
S&P 500 2088.77 18.10 13.01%
NASDAQ Composite 4806.86 41.48 15.09%
S&P MidCap 400 1467.90 18.59 9.34%
Russell 2000 1215.21 18.59 4.43%

This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

1Source of data Reuters, obtained through Yahoo! Finance Closing data as of 4 p.m. ET.

The opinions expressed above should not be construed as investment advice. This article is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this post should be interpreted to state or imply that past results are an indication of future performance.

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