The Fed’s Steering the Sled So Don’t Ho-Ho-Hold Your Breath

by Kenny Polcari
By Kenny Polcari

Not to be a downer, but I wouldn't ho-ho-hold my breath waiting for the bearded, fat guy in the red suit to deliver a rally to the stock market this year.

Granted, I might be a little premature in saying that. The Santa Claus rally, one of many seasonal patterns throughout the year, specifically refers to the last five trading days of the year and the first two days of the new one.

So, it's still possible for Santa to deliver the average 1.3% gain for the S&P 500, according to the Stock Trader's Almanac, during that period.

Interestingly, this seasonal rally often has little to do with the market climate heading into the final trading days of a given year, or how it will impact the near future.

Weak or strong, bear or bull, Santa doesn't discriminate. Why? Because there's more sugar plums than beef behind the reason for the rallies in the first place.

Theories range from simple holiday cheer (optimism and brandy-spiked eggnog) to investors sinking their year-end bonuses into the stock market.

Let's visit recent history and how the Santa Claus rally played out in 2008, the first year of the Financial Crisis and ensuing stock market crash.

The Santa Claus rallyfrom the end of the year in 2008 to the beginning of 2009, a rally with the best historic returns.
Click here to view full-sized image.

 

Between the five days post-Christmas and two days of January 2009, the S&P 500 gained 7.5%. However, it crashed again shortly after and declined to lows on March 9. Once the dust cleared from the financial fiasco, the broad-market index gained 23%.

The same pattern happened in 2018, when the Santa Claus rally set the stage for further gains of 29% and a bull market in 2019.

Rudolph, his reindeer friends and investor optimism clearly led Santa's sleigh in those years, but now …

The Federal Reserve Is in the Driver's Seat

Yes, the S&P 500 delivered 1.4% gains during the seven-day period in 2021–2022, but the market peaked on Jan. 3 and officially entered a bear market in June, falling more than 20% as the Fed aggressively raised interest rates.

Now, six months later, here we are waiting with bated breath for the rally to materialize, especially if we're putting any weight in the bonus theory.

With the Fed out to steer the proverbial economic sled into the ground and the unemployment rate from here to the North Pole, many folks might find pink slips — instead of greenbacks — in their stockings before year's end.

Go ahead and just say it: Bah, humbug!

Believe me, as much as I wanted to spew optimism about a year-end rally, I just can't sugarcoat the truth.

Besides, a 1.4%, seven-day rally isn't going to make a dent in anyone's Christmas list. However, a sustained uptrend might.

But since you're not steering the sled either, the best and safest strategy is to control what you can and keep the coal out of your portfolio.

Today, it's much healthier to overstuff it with stuff-that-people-need stocks, which tend to be big, boring yet beautiful names that pay decent dividends in sectors like consumer staples, utilities, healthcare and energy.

Then, complement and underweight the above with other sectors that you like that may underperform going into 2023 … but are expected to outperform later in 2023.

Finally, always have a plan, stick to your goals, take advantage of dollar-cost averaging in your long-term accounts over time and, if appropriate, become a part of the year-end tax loss harvesting herd.

Just don't sit idly, hanging onto losing positions or following unsuccessful strategies ho-ho-hoping for a Santa Claus rally to come to the rescue.

Above all, enjoy the holidays with your family and friends!

To your Wealth & Wisdom,

Kenny Polcari

P.S. Chris Coney, editor of our Crypto Yield Hunter, has slipped on his educator hat to demystify the word of decentralized finance.

In his 2023 DeFi Superyield Webinar, he explains how he's been using DeFI to find impressive opportunities to go for yields of 9%–44% … all while other investors sit on their hands and wait for a better market.

The full webinar is available to watch for FREE. I suggest you do so sooner rather than later.

About the Financial News Anchor & Analyst

A professional trader since 1981, Kenny went from intern to floor trader to governor at the NYSE. He ran a division of a major Wall Street bank and built the U.S. equities business at one of the world’s largest broker-dealers. Today he shares his four-plus decades of financial acumen with Weiss members via his Wealth & Wisdom service.

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