by Joe Herrle, CFA
Vice President, Alternative Assets
The holidays are upon us, and at Ferguson Wellman, that means giving thanks, being grateful, staying humble and wishing for the best. And while we take the time to enjoy the festivities, we also keep one eye on the markets to see what lies ahead as the year closes. From now to the end of the year, market participants wait to see what rewards the “Santa Claus Rally” brings.
A Santa Claus Rally (SCR) is the tendency for the stock market to have positive returns during the last few weeks of December and into the new year. Specifically, it refers to the last five trading days of the year and the first two of the new year. According to the Stock Trader’s Almanac 2020, an SCR has occurred 57 times between 1950 to 2020, with an average gain of 1.3% during the seven-day trading period. However, significant market declines have also occurred during the seven-day window, demonstrating the risk of investing in calendar-based market anomalies. As with all market anomalies, it may just be random, and there is no guarantee that it will continue. Therefore, while we find it an interesting phenomenon, we do not view the SCR as an investible event.
So, what has Santa Claus brought the markets thus far? Volatility, for the most part. The coming Federal Reserve tapering and rate hikes, new COVID-19 variants, supply chain issues and concerns over inflation all add to the uncertainty of what’s to come in 2022, translating to volatility. But this return to more volatile markets is not cause for alarm. So far in 2021, the market has seen only six days where it moved up or down more than 2% compared to 2020, when the market had 44 days where the market moved more than 2%. Also, if you take the largest market drawdown in each year since 1980, the average is 13%. So far, in 2021, the most significant drawdown the market has experienced is about 5.4%. So, with such an unusually steady market in 2021, an increase in volatility would mark a return to the norm.
With volatility expected on the horizon, it is paramount to stay the course with your investment strategy and revisit some of the reasons why the U.S. economy, and the market, are well prepared for 2022.
First, U.S. consumers, on average, are in a financially strong position. According to Evercore ISI, consumer net worth is on track to grow at a 15% annualized rate in the fourth quarter of this year. Second, the employment picture is robust, with a current unemployment rate of 4.2%. If the trend of new jobs with fewer unemployment claims continues, 2022 could see an unemployment rate with a “three” in front of it.
Regarding the economy overall, S&P 500 company earnings are on track for 32% annualized growth in the fourth quarter and U.S. GDP to increase over 12%. Furthermore, the Federal Reserve projects 7% GDP growth in 2022. The economy drives earnings, and earnings drive the markets. With that in mind, we remain optimistic about the market outlook in 2022 despite the anticipated rise in volatility.
Happy Holidays
It is our distinct pleasure to serve our clients, and we are hopeful for what 2022 will bring. From everyone at Ferguson Wellman, we sincerely wish you and your families a safe, healthy, and happy holiday.
Our Takeaways for the Week
The Santa Claus Rally often makes market news headlines this time of year, but it is not of significance for long-term investors
Expect an increase in volatility over the next year as markets begin to normalize
The U.S. economy, consumer and market are set up well for 2022