The absence of the traditional Santa Claus rally, a period typically marked by positive market trends during the last five days of December and the first two days of January, has raised concerns among investors.
Historically, the S&P 500 (SPX) has seen positive returns during this period about 78% of the time, with an average return of 1.6%, according to Bank of America’s analysis. However, this year, the SPX declined by -0.88% during the Santa Claus rally period.
“This is a risk to January, 1Q and 1H of 2024, which aligns with the tendency for the SPX to struggle in early Presidential Cycle Year 1,” analysts at BofA said.
In instances where the Santa rally is absent, January tends to have a higher likelihood of negative returns, occurring 55% of the time, with an average return of -0.38%.
“January has plenty of trading days left, but a down January would generate a bearish January Barometer signal for 2024.”
Moreover, when the SPX misses the Santa rally, both 1Q and 1H returns are significantly weaker than historical averages. The SPX is down 60% of the time in 1Q, with average and median returns of -1.2%, and up only 55% of the time in 1H, with an average return of -0.74%.
Moreover, January tends to be “a tough month” during Presidential election years, with a success rate of only 48%, featuring an average SPX return of 0.05% and a median return of -0.16%.
This bearish trend intensifies when there's no Santa rally entering a Presidential Cycle Year 4, resulting in weaker-than-average returns in 1Q and 1H.