Why The Calendar Might Signal A Good 2023 For Stocks

There’s total agreement on one thing about 2022: It was a malodorous year for the stock market. What about next year? Right now, the most common outlook is that it will be no treat either, with the continuing war in Ukraine, the possibility of another Covid-19 outburst as the disease spreads through China and, of course, a recession.

As of Friday’s close, the S&P 500 had lost almost 20% for 2022, the worst tumble since the financial crisis. Now, back-to-back yearly market losses do occur, but that’s a rarity. The market has had a consecutive two-year slide only four times since 1928. When that happens, the second year (gulp) tends to have the bigger drop.

On the other hand, as Sam Stovall, chief investment strategist at CFRA, reminds us, the start of a new year often augurs how the coming 12 months will fare. If a “Santa Claus rally” took place, then the market finished out the year with a positive performance 77% of the time since World War II, Stovall writes in a research report. The rallies’ rise was an average annual 9.8%. The thinking apparently is that investors who push the market into the black during that year’s start-out period have an optimism that will carry stocks throughout the year.

Currently, a Santa Claus rally is in progress … barely. The timespan measured is the last five trading days of the old year and the first two ones of the new. The first five days are behind us, and the benchmark index has increased to 3,839 from a 3,822 start point. That’s a measly 0.44% upward move. And the advance was choppy, with three of them down days. So that leaves two days next week to render the rally a reality or a bust.

For what it’s worth (in dollar terms, nothing trivial), during that 23% of the time when Santa didn’t come, the result averaged a 4.7% loss. The phenomenon of a Santa Claus rally was originated by Yale Hirsch in his Stock Trader’s Almanac. In 1972, Hirsch put the concept to rhyme: “If Santa Claus should fail to call, bears may come to Broad & Wall.”

Well, if Santa gets stuck in the chimney this time, other early-2023 chances exist that might give the market some heart. A good first five days of January led to a positive year (67% of the time in the post-war era) and a good January as a whole also was salubrious (60%). Both are hopeful portents. More calendar stuff: Stovall points out that the first quarter was in the red 82% of the time. But, he adds, if the negative initial quarter wasn’t as bad as the year-prior’s January-March span, then half the time the whole year ended up positive, with an average 18.5% showing.

Certainly, no calendar quirk will rule the market’s path, regardless of what the statistics say. Those dreaded happenings, know as exogenous events (the Ukraine war is one), have a way of tumbling in from the sky and disrupting everything. As Stovall puts it, “Prices typically lead fundamentals, so while these indicators frequently offer clues as to the market’s likely direction, look upon them as guides to what may happen, but not necessarily guarantees as to what will happen.”