Stock Market Correction Coming Before The Santa Claus Rally

Is a stock market correction coming before the Santa Claus rally at the end of the year?

It is a fascinating turn in sentiment, given that investors were convinced of the bear market’s return just a month ago. Now, investors are “making their list and checking it twice.” Given the 10% advance over the past month, it isn’t surprising, as hope rises that the Fed will return to more accommodative policies next year. Earnings remain very “nice,” and the market views the economic risks as primarily priced in.

There are indeed “naughty” economic indicators, but the market seems convinced it will all be transient. Furthermore, companies seem to be able to pass costs along to consumers, at least for now. The hopes are high that profit margins will remain strong and earnings will eventually catch up to valuations.

Investors’ “wish lists” are hung by the chimney with care, hopeful the “Santa Claus rally” will soon be there. While they remain “snug in their beds, the historical data dances in the heads.” The chart below from shows the annual S&P 500 index “seasonality.”

S&P 500 Index Seaonality

There is little to worry about, and a significant stock market correction is unlikely.

However, notice that dip at the beginning of December.