Santa Claus Rally This Year?

Equity update

Santa Claus Rally This Year?


Equity markets cooled off in the third quarter after a strong start to the year.  A flat third quarter for large domestic stocks still leaves the S&P 500 Index up over 15% for the year and over 30% for the trailing 12 months.

Bradley A. Ruppert, CFA®
Executive Vice President
Chief Investment Officer
513-932-1414 ext. 59105
bruppert@LCNB.com
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Small cap issues, represented by the Russell 2000 Index, dropped in the third quarter and now trail larger stocks for the year-to-date period. International stocks continue to lag as foreign economies have recovered at a slower pace than the U.S.
Despite a flat quarter, domestic stocks remain overdue for a pullback as they continue to bounce near record highs. It is typical for the index to test or breach the 200-day moving average about once a year, which has not happened since June of 2020 as seen below. The so-called “Santa Claus” rally has often lifted markets around year-end and into the following year. In addition to consumer spending picking up around this time, year-end bonuses and 401k/IRA contributions get deployed into markets. But what if Santa doesn’t deliver this year? While long-term we still think stocks provide the best hedge against inflation and the economic cycle should have legs, we caution against near-term bullishness. If economic growth slows as predicted by the Atlanta Fed’s GDPNow, then earnings growth will likely also slow. Factor in the potential for higher taxes next year, already high PE ratios, and a market overdue for a correction and we are moving to a more defensive position. We recommend a slight underweight to all domestic stocks with a neutral weight to international stocks.