If there is anything I’ve talked about most it’s the fact that the stock market doesn’t care about what is going to happen today, it only cares about what will happen tomorrow (or what will happen in 18 months).

The reason Apple stock doesn’t rally 10% when it announces a new iPhone is because everyone in the market knows that Apple always releases its new iPhone in September. Therefore the market looks to see what the implications could be and prices in different scenarios as Apple gets closer to launch day. Once launch day arrives most of the move has been priced in by market participants.

We don’t find ourselves in a priced “up” scenario though. The Federal Reserve has made it very known that it will not be finished until inflation is coming steadily back down to its 2% target. That policy affects the market, and it affects the market in a negative way. Soon we won’t have to worry about policy risk, it’ll be all about growth. That’s not what this post is about though, it is what this post is about though.

For the fun of it I wanted to see what ChatGPT, Elon Musk’s AI, had to say about the Santa Claus rally but in the form of a Christmas song (because ‘tis the season). ChatGPT is feeling a little bit better than I am about a Santa Claus rally:

Verse 1: It's that time of year again When the markets start to rally Santa's in town, he's spreading cheer To all the traders and their families

Chorus: It's the Santa Claus Rally Stocks are on the rise Traders are feeling jolly As they watch their portfolio fly

Verse 2: The holiday spirit is in the air The market's feeling extra festive Investors are hoping for a big return As they buy and sell and rest

Chorus: It's the Santa Claus Rally Stocks are on the rise Traders are feeling jolly As they watch their portfolio fly

Bridge: This time of year is magic The market's feeling oh so fine Traders are hoping for a big boost As they watch their investments shine

Chorus: It's the Santa Claus Rally Stocks are on the rise Traders are feeling jolly As they watch their portfolio fly

What is a Santa Claus Rally?

A Santa Claus rally describes a sustained increase in stock prices that occurs in the week leading up to December 25th. There is some disagreement over whether these rallies happen in the week leading up to Christmas, or if it's the week after Christmas until Jan 2.

But it really doesn’t matter when, because what’s more important is how.

Usually towards the end of the year people (because people are what drive the stock market) are making year-end retirement contributions, meanings they are putting money into a Roth IRA, trad IRA, 401(k), etc. All of that new money has to get invested. So you have a higher new demand with a similar supply. Meaning the prices must go up.

But that’s not the only thing. Usually Wall Street goes on vacation during this time of the year, leaving the market up to the individual retail traders, who generally are more optimistic about things, as a larger piece of the market pie. People are also getting Holiday/End of year bonuses that are being put to work in investment accounts. Again an influx of cash that needs to be invested (demand) with fewer suppliers (less institutional money) means prices must go higher.

So that is a Santa Claus rally, it’s simply a random occurrence where stock prices are supposed to go up because there is new money coming into the market and less pessimistic institutions playing (selling) in that market.

Did we get a Santa Claus Rally?

Let’s just start off by saying no, no we did not. Last week we had Jerome Powell step out on the press floor and tell every investor that they do not intend to stop, even with inflation rolling over. Inflation peaked in June at 9.1%, now it’s sitting at 7.1% (still high but it has been steadily rolling over). At this rate, inflation should come down fairly quickly and there is still the question of whether or not the Fed has taken it too far.

That bump up and subsequent bump down was due to the speculation that the Federal Reserve has gone too far with monetary policy already, or will go too far according to its own projections. We will start to see that play out with growth risk in the coming year.

We aren’t to the end of the speculated Santa Claus rally. Either it ends December 25th or its ends January 2nd. But it doesn’t matter let’s just call the whole thing part of the Santa Claus rally.

The jolly old guy probably isn’t going to come around this year and with ESG funds seeing a net outflow of assets maybe he better bring a lump of coal for the stock market.

The Federal Reserve has made sure that the institutional money stays in the market as they try to break the puzzle that is the Federal Reserve.

Along with that many people won’t be getting as large of a holiday bonus because of poorer business conditions, and retail investors may not have the extra cash to be throwing into the market this year because of inflation.

Maybe farmers will make up for that with the 20% increase in net farm income this year, but it’s likely they’ll use that for buying equipment as tax write-offs.

Don’t get your hopes up for a Santa Claus rally, maybe prepare yourself for an Easter Bunny rally as the worm finally turns for the Federal Reserve.