Santa's Back

‘The Santa Claus rally is real,’ said Bank of America strategists in a research note back in March, highlighting just how much U.S. markets love December. Since 1928, the probability of the S&P 500 rising this month is 74%. Make that 83% in election years. BofA has also found that the last ten trading days of the year tend to outperform the first ten. 

This year, market conditions are certainly different to when we hoped for a Santa rally in 2022. But can these good times keep rolling? Considering the S&P 500 has already hit all-time highs 54 times in 2024 – well above the average of 18 per year – another massive leg up may look a little ambitious. 

Still, investors seem to be gearing up for positive end-of-year price action as short sellers capitulate, according to S&P 500 futures data analysed by Citigroup. Goldman Sachs believes the S&P 500 will end 2024 at 6200 points, while JPMorgan says that 6300 isn’t off the cards.

Some of the obvious candidates for a year-end boost are retail and consumer-focused stocks that benefit from extra holiday spending. Ulta Beauty shares ($ULTA), for instance, just had their best day in two years last Friday after the company raised its annual profit forecast. Its full-year outlook now puts net sales between US$11.1b and US$11.2b.

Another retailer with big share price gains last week was Lululemon ($LULU). Shares ended 8% higher on Thursday after the company’s Q3 earnings report proved at least some holiday shoppers are still keen on adding Lulu’s (somewhat overpriced) yoga pants to their bags. The firm expects next quarter’s revenue to sit between the expected range of US$3.48b and US$3.51b. 

Perhaps no one is better suited to take on the holiday cheer than Amazon ($AMZN). With the world’s largest e-commerce platform, the firm’s logistic capabilities alone give it an edge over competitors, as far as operating margins go.

Then again, a consumer-led profit boost is just one of the factors driving a Santa Claus rally. It’s just as likely that investors are engaging in a little portfolio rebalancing as they invest year-end bonuses, returning to the market after a season of tax-loss harvesting. If that’s the case, retailers won’t necessarily be the only beneficiaries.

The usual suspects of late – Nvidia ($NVDA), Tesla ($TSLA), Apple ($AAPL), Meta ($META), Microsoft ($MSFT) and Alphabet ($GOOGL) – could continue to dominate trading activity. And as investors gear up for a second Trump presidency, their asset allocation strategies will almost definitely factor in changes to trade and, potentially, consumer prices. 
Whether or not a Santa rally leads to a sizable stock market spike, it's worth positioning portfolios before the new year – especially if you believe in the January effect.