What Santa Claus, Q4 And 2020 Say About 2021’s Market Return

In November and December the media was all abuzz with the Santa Claus Rally (SCR) and January Effect. Now that the SCR has ended and there is a result,  no one seems to care about it. That’s very typical. If you are keeping score at home, the SCR which is technically the final five trading days of the year and first two of the new year, yielded +1%. Revisiting Yale Hirsch’s old adage, “Should Santa Claus fail to call, bears will come to Broad and Wall”, we see that there is no warning of a decline in 2021. My own research didn’t yield the same conclusion as Yale’s as it’s not a bear market that lay ahead, but rather a first half decline that was usually in Q1.

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I have daily stock market data back to 1926 and while I could go all the way almost 100 years, I chose not to. I have always said that markets morph and evolve. What happened that far back when stocks traded on Saturdays and were closed for war has absolutely no bearing on today. Lots of folks use data since 1950. I do as well for some studies and when I am not lazy. My favorite periods to use are since 1990 and since 2000. I think a whole lot changed after the crash of 1987 and then again in 2001 and 2007.

Since 1990, a positive SCR has led to a positive following year 19 out of 23 times or 82% of the time. This seems too good to be true on the surface. 82% hit rate? That turns your head as an investor. It’s also where the average would stop their research. The problem is that it isn’t compared to any random period. Since 1990 23/30 years or 77% of the years have been up. 82% versus 77% doesn’t seem so powerful now, does it? In fact, if one more year since 1990 was up instead of down, we are now talking about something that is basically a coin flip. What that all means is that a positive SCR is statistically insignificant in forecasting the next year’s positivity.

Going one step further, let’s look at years where SCR, Q4 and the calendar year were all positive. That happened 15 times since 1990. 13 of those years, or 87%, led to positive year ahead versus 77% on a random basis. 1990 and 2018 were the failures. Both of those years saw declines of at least 10% by April.

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