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Let’s dive into the whirlwind start of the new year that’s left investors scrambling. The S&P 500, after a spectacular rise in the last quarter of 2023, has stumbled into 2024 with three consecutive days of losses, totaling a 1.64% drop. This marks the most significant dip since last October, catching many off guard.
But there’s more to the story than just these early hiccups. We’re also witnessing the aftermath of the much-anticipated Santa Claus Rally, which, frankly, didn’t quite deliver the cheer this time. For those new to the term, let’s take a brief detour into history.
The concept dates back to 1972, thanks to Yale Hirsch’s insight. He noted that stocks generally see an uptick during the last five trading days of a year and the first two of the next. Thus, the Santa Claus Rally was coined – an indicator that has historically promised investors an average gain of 1.3% in this period, about 80% of the time.
But the true essence of this indicator isn’t just in these short-term gains. It’s seen as a bellwether for the year ahead. Jeff Hirsch, following in his father’s footsteps, expanded on this idea in the Stock Trader’s Almanac by introducing two more January-centric indicators: the First Five Days and the January Barometer, the latter measuring the market’s performance for the entire month.
The potency of these indicators was evident in 2019. When all three showed positive results at the start of that year, the following eleven months saw gains 87.1% of the time, with an impressive average increase of 12.3%. The entire year showed progress 90.3% of the time, with an average S&P 500 gain of 17.5%.
Let’s rewind to last year for context. On January 4, 2023, the S&P 500 was up 0.9% during the Santa window. The First Five Days indicator showed a 1.4% increase. By the end of January, the benchmark index was up by 6.2%.
While these indicators suggested a green light last year, investors were still reeling from the blows of one of the worst performing years for a traditional 60/40 portfolio. The start of 2024, with its initial setbacks, suggests a cautious approach may be wise. Investors, it seems, are still finding their footing in a market that continues to defy expectations.
