Hopes for Santa Claus rally shrink

Stock market sentiment has turned negative

After another rough start to the week for the S&PTSX Composite Index, grizzled investors have been left with a case of holiday deja-vu: Much like their eight-year-old selves, they’re finding it more and more difficult to believe in Santa Claus.

Over the past 15 years, Canadian investors have often seen their yearend returns increased by the fabled Santa Claus rally — a hopedfor boost to equities markets that typically arrives in the final two weeks of December. Between Dec. 17 and the end of the year, the TSX has seen average rallies of 1.7 per cent, with the largest one — 3.6 per cent — occurring in 2011. Although they’ve quieted in the last three years, the last time investors did not receive some year-end kick was in 2002.

This year may be different. “I think (investors) are hoping and praying for it, but they’re not believing in it,” BMO Capital Markets chief investment strategist Brian Belski said. “The climate of the last two weeks has changed dramatically. The negative sentiment we’re seeing is approaching 2008 levels.”

In the first two weeks of December alone, the TSX had dropped more than four per cent as of Tuesday close. On Monday, it fell more than 200 points, before rebounding 50 points on Tuesday. Year-todate, it has seen losses of 11 per cent.

Just to break even on the year, investors would need a Santa Claus rally greater than the last seven combined. Such a rally would be “historic,” Belski said, and virtually impossible without China and U.S. reaching a surprise trade deal.

American investors have reason to be even more pessimistic: Santa has failed to show up in seven of the past 15 years for Dow Jones Industrial Average index investors. While the Dow has fallen less than the TSX this year — nearly five per cent — its December performance is the worst on record since the Great Depression, according to CNBC.

The Santa Claus rally has never been a given, Picton Mahoney Asset Management portfolio manager Michael White said. And yet its relative consistency over the last 15 years has left Canadian investors accustomed to receiving a year-end bump. Each day that passes without it is only leading to more anxiety among already jittered investors who have convinced themselves a recession is on its own.

“Hope is not an investment strategy,” said White, who adds he doesn’t bake in an end-of-year rally into his portfolio projections.

In fact, he says he is confused by those who do anticipate such a rally, which he says is "nothing more than a series of interesting statistics.”

Indeed, the rally is an enigma for investors and perhaps that’s part of its appeal. Asking three different investors why it happens results in three different answers.

White argued that the rally is attached to a period of the year where investors are selling poorly performing stocks so that they can realize taxable losses to offset their realized gains at year-end. It’s these stocks that often become associated with the rally, White said, because they present an intriguing buying opportunity when they’ve been all but abandoned.

Belski sees the rally as a result of what he calls a yearly move by portfolio managers to buy the bestperforming stocks simply so they can show shareholders that they didn’t miss out on them. “It’s like a self-fulfilling prophecy,” he said.

It’s all psychological as far as Allan Small, senior investment advisor at Allan Small Financial Group — Holliswealth, is concerned. Investors, like many people, tend to feel upbeat during the holiday season. That holiday cheer, Small said, leads to them spending money, not just for parties and gifts, but in the market. As a result, he’s still predicting that the TSX will close the year higher than it is now.

“The market is, how can I put it in a nice way, stupidly cheap,” he said, suggesting a rally could drive positive momentum heading into 2019.

It may not be enough to offset their losses, but Belski thinks investors will find at least something nice under the tree this year.

“Santa is hiding is his sleigh right now, trying to dodge the bullets as well,” Belski said. “We’re overdue for a positive surprise and I think Santa could bring it.”