Will The Santa Claus Rally Deliver in 2015?

HartChris Hart, Core Investment Manager

It is that time of year again. The time when Wall Street pundits begin to talk about the potential for the stock market to deliver its year-end present to investors, neatly wrapped in the form of positive gains to finish out the year, and even carry over into January. While seasonality is typically associated with the entire fourth quarter of a given year—as November and December tend to be stronger months for the S&P 500 Index—the “Santa Claus rally” is a more defined subset.

The Santa Claus rally concept was first popularized in 1972 by Yale Hirsch, the publisher of the Stock Trader’s Almanac, when he identified the positive trend between the last five trading days of the year and the first two trading days of the New Year. Over those seven trading days since 1969, the S&P 500 Index posted an average gain of 1.4%. However, investors have had to wait until the last week of the month to see if the actual Santa Claus rally occurs.

Over the years, analysts have speculated many possible explanations for the notion of a Santa Claus rally. One is that investors are simply more optimistic in the holiday season and market bears are on vacation. Others contend that consumers may be investing their holiday bonuses. A more technical explanations could be that year-end, tax-loss selling creates oversold conditions (i.e. buying opportunities) for value investors to buy stocks. Some propose the theory that portfolio managers may try to “window dress” their portfolios in an effort to squeeze out additional performance before year end. Regardless of the various possible explanations, market data supports the idea that since 1950, December has been the best month of the year for the S&P 500 Index.

Strategas: Historically the Best Month of the Year

Source: Strategas

That said, there are no guarantees on Wall Street and the delivery of a Santa Claus rally is no exception. In fact, the lack of a rally could be an important market signal. The Stock Trader’s Almanac warns, “If Santa Claus should fail to call; bears may come to Broad & Wall.” Interestingly, Jeffery Hirsch, son of Yale Hirsch and current editor of the Stock Trader’s Almanac, notes that over the past 21 years, the Santa Claus rally has failed to materialize only four times, and that preceded flat market performance in 1994 & 2005, and down markets in 2000 and 2008.

With so many macro forces at work here in the U.S. and globally, the presence of both headwinds and tailwinds in the current market allows room for debate as to whether or not the Santa Claus rally will occur 2015. The dollar remains strong, manufacturing is slowing, and energy remains under pressure due to low oil prices. However, valuations are not unreasonable, economic growth continues, albeit modestly, and we are seven years into a domestic bull market that continues to move higher amid shorter-term bouts of resistance and volatility. While some naysayers contend that the abnormally strong gains in October may have cannibalized some of December’s potential rally, I believe the Federal Reserve is one of the real wild cards here. If the Fed decides to raise interest rates in mid-December for the first time since 2008, higher levels of uncertainty could temper investor enthusiasm, depending on the Fed’s language regarding the duration and magnitude of any such action.

While I remain a believer in the magic of the holidays and am optimistic that the market can justify a Santa Claus rally in 2015, there are too many mixed signals across the markets to be certain. In the end, I just hope the Santa Rally of 2015 does not prove to be as elusive as that clever little Elf on the Shelf.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Handling ETFs at the Brinker Capital Trading Desk

Joe PreisserJoe Preisser, Portfolio Specialist, Brinker Capital

In light of the continued media attention focused on the performance of certain exchange traded funds, during the equity market selloff at the end of August, we thought it prudent to discuss the steps we take here at Brinker Capital to ensure that all of the client orders entrusted to us are handled with the utmost care.

The price action seen across the exchange traded fund (ETF) landscape in late August, and in particular on the 24th, was nothing short of extreme, and is something our trading desk makes every effort to protect our client’s orders from.  We use our trading expertise and depth of experience to ensure that we make every effort to achieve the best executions available for our client’s orders.  ETFs have truly changed the investment landscape through their unique construction and, as a result, require a thorough understanding of their characteristics in order to effectively trade them. We pride ourselves on having gathered a great deal of knowledge, insight and experience in trading these instruments over the past five and a half years, and on having developed strong relationships with a number of well-respected trading desks on Wall Street to further enhance our expertise.

As many of the articles in the financial press discussed, there was a historic level of volatility during the first hour of trading on Monday, August 24, with much of the drastic price swings caused by the exorbitant number of trading halts that occurred across equity markets.  As an ETF is predominantly a simple reflection of the average price of its components, if those underlying constituents are halted, the ETF will not be priced appropriately by the market makers transacting in the security.  This problem can also occur on more mundane openings as well, as an ETF’s components open for trading at slightly differing times.  As a result of this phenomena, unless we have a very specific reason for trading an ETF during the first few minutes of a trading session—an ETF with European exposure would be an example of an exception—we will generally avoid trading during the first fifteen to thirty minutes of the session in order to allow for all of an ETF’s underlying holdings to open and the initial volatility to abate.  Although we did not have any active orders during the morning of August 24, if we had we would not have been transacting until the volatility abated.

shutterstock_70010218The strong relationships I mentioned earlier, with several of the most respected trading desks on Wall Street, allows us to leverage their expertise whenever we are moving into or out of a large position. We carefully examine every instrument we are asked to trade, and make our decisions on an individual basis as to what the best approach would be in order to minimize our impact on that instrument and to attempt to achieve the best possible executions.  Often, when we have a large order in an ETF, which itself is relatively illiquid, we will utilize the expertise of one of our trading partners to transact directly in the basket of securities that comprise the ETF in order to access the truly available liquidity and to minimize our impact on the security we are trading.  This strategy of course would not have helped on the 24th because it was the temporary illiquidity of the underlying securities that rendered the ETFs themselves illiquid, but I feel this example is important as it highlights the efforts we undertake in an effort to seek the best possible prices for our clients. In addition, a number of the articles discussing this episode highlighted the importance of imposing price limits while avoiding the use of “market” orders and this is a guideline we strictly adhere to.  Whenever we have a meaningful trade, we always set an appropriate limit, and will closely monitor the trade until its completion to ensure that the price does not deviate from the parameters which we put in place.

While this article has discussed our approach to ETF trading, we certainly apply the same level of expertise, care and attention to all of the client orders placed in our care, regardless of the investment vehicle.

Brinker Capital, Inc., a Registered Investment Advisor. The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.