Santa Claus Predictor

Several years ago, Simon Maierhofer, editor and founder of iSpy ETF Newsletter, introduced me to a combination of three barometers that have had interesting results in predicting the future S&P 500 performance of the new year. These three barometers monitor the performance of the S&P 500 during specific days of the prior year, December, Christmas, and the new year. These three periods make up what is known as the “Santa Claus Barometer.” The specific days for this Santa Claus barometer are:

•  Santa Claus Rally (SCR) – Prior Year December 26 to 31

• First Five Days of Current Year January (F5D)

• Current Year January Barometer (Jan)

Certain combinations of the returns during these three periods have had very high success in predicting the future outcome of the S&P 500. For example, only 19 times since 1970 have all three periods had positive returns. However, 100% of the time, when these three periods were positive, the S&P 500 ended the year remarkably with a positive return. The most recent occurrence was in 2019 when the S&P 500 soared 28.9%.

Unfortunately, the Santa Claus Barometer did not provide a clear indication for 2024. Here is how the S&P 500 performed during these three periods:

• SCR -0.1%

• F5D -1.52%

• Jan 2.32%

However, looking back to 1970, there were four other occurrences when the S&P 500 was negative in the first two periods and positive for the month of January, with the most recent occurrence just last year. Below is how the S&P 500 performed in that year:

• 1985 26.3%

• 1991 26.3%

• 1993 7.1%

• 2023 24.2%

I thought it surprising that not only were the returns of the S&P 500 nearly identical in 1985 and 1991, but in all four years, the outcome of the S&P 500 was positive, with an average return of 21.0%.

Below is the reference table going back to 1970 outlining the performance of the S&P 500 for each of these periods, with the referenced years highlighted in yellow.

WHAT DOES IT MEAN TO ME?

During all of last year, we maintained our favorable rating on the US economy and stock market despite many calls by analysts of a pending recession. When the major indices began to sell off starting July 31, we suggested this was the result of re-balancing portfolios and would set the base for a new rally by the end of the year.

The S&P 500, along with the other major indices, retracted about 50% of the prior year’s gain from July 31 to October 27. The economy never hinted at a recession, while employment remained strong and household finances were stable with fixed mortgage rates. The market did bottom from this selloff on October 27, and the major indices soared for a near-record return through the end of the year. Below are how the major indices performed from October 27, 2023, to December 31, 2023:

S&P 500: 15.85%
Dow Jones Industrial Average: 16.26%
NASDAQ: 18.73%
S&P 400 (Mid Cap): 19.54%
S&P 600 (Small Cap): 23.34%

It is worth noting that the small-cap and mid-cap indices were the best-performing indices during the last days of 2023 but trailed well behind the tech sector NASDAQ index and S&P 500 large-cap index for 2023. The reference here is typically that the underperforming sectors of the past can become the top-performing sectors in the future.

Below is a chart of the performance of all the major indices for 2023.

We maintain our favorable view of the US economy and stock market for 2024. The same positive factors in the economy that propelled the stock market in 2023 still exist for 2024. Another factor is that 2024 is an election year, and politicians will be busy campaigning for their jobs and will not have time to pass new tax laws or restrictive policies on businesses. This may provide smooth sailing for investors who, for now, do not have to worry about higher taxes that cause them to lower earnings and raise unemployment levels. The Federal Reserve, for now, also appears content to hold interest rates to monitor the direction of inflation, with some analysts predicting the Federal Reserve may even lower rates later this year.

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