December Outlook: Get Ready for the Santa Claus Rally!
By: Jeffrey A. Hirsch & Christopher Mistal
November 30, 2023
Right on cue the market correction ended just before the end of October. As we went to press with last month’s outlook on Thursday, October 26, NASDAQ halted its 3-month slide with a loss of -12.3%. DJIA and S&P 500 finished their corresponding seasonal drops the very next day with losses of -9.0% and -10.7% respectively. Then just as we expected this November-to-remember rallied NASDAQ up 13.4% from the October low with S&P and DJIA both up 10.9% at today’s close. 
So, what’s with all the bearish sentiment we keep hearing from Wall Street analysts and CEOs and many market pundits? Just this morning on one of the national financial news shows the anchor and reporter were looking for reasons Q3 GDP was so robust at 5.2%. Their conclusion was that the work-from-home crowd is consuming instead of commuting and of course when they are forced to go back to the office next year all the spending will end. 
Yesterday, at the vaunted New York Times DealBook Summit, everyone’s favorite big bank CEO delivered some dire warnings that he is cautious about the economy, inflation is hurting people, recession is not off the table, and this is a very dangerous time. We have geopolitical and economic concerns as well. They are always a factor for us. The current heightened turmoil is one of our main worries, but our reading of the economy is that it is rather resilient and that is being reflected in the market’s upswing.
Inflation is cooling and the Fed, despite any jawboning you may hear, is done with increases for all intents and purposes and is only posturing to remind everyone that they are data dependent too. Today the Fed’s favorite inflation indicator reading PCE hit an 18-month low of 3.0% annual rate. Inflation’s cooling trend is rather apparent in our favorite chart of CPI, PPI and PCE.
With November logging its fourth best gain on the S&P since 1950 at a whopping 8.9% for the month there’s some concern that the strong November will take from December’s usual gains. However, when we ran the numbers, the impact was rather negligible. The other top three Novembers 1962, 1980 and 2020 were followed by up December 2 out of 3 times with December 1980 being down -3.4%. 
While two out of three ain’t bad, as Meat Loaf would say, December is up 74% of the time in all 73 prior years since 1950. The top 10 and top 20 Novembers were followed by up December 70% of the time, though average gains are a little above average for the top ten at 1.8%. So, all in all, big November gains take very little if anything away from historically strong Decembers. In short, gains beget gains.
We still don’t understand why so many on The Street are so bearish. It’s the holiday season. It is seasonally the most bullish time of the year. And seasonality remains on track and firing on all pistons as does the 4-Year Cycle. Market internals and technicals continue to be supportive. Those that may remember the 1990s will recall that the market can flourish, driven by innovation and technology – can you say AI? – even when interest rates are at current levels or even higher. The bond market continues to signal a declining trend in rates with the 10-year and 30-year bond yields retreating off the recent highs.
[Chart of 10-Year and 30-Year]
Seasonality Rules
We are just at the beginning of the Best Six Months of the year and the Best Three consecutive months of the year. It’s also a pre-election year, the best year of the 4-year cycle, that often sees a new high in December and frequently on the last trading day of the year. December has been a solid month in all years as well as pre-election years, ranking second or third no matter how you slice it.
After some likely first half December tax-loss selling pressure, we look forward to seeing Santa’s arrival and a positive Santa Claus Rally. Then we will be watching for a positive First Five Days and January Barometer, what refer to as our January Indicator Trifecta. Until the market says otherwise, we anticipate them all to be positive. But as we always remind readers: if these seasonal indicators are negative and the market does not rally as it normally does during these bullish seasons, we will likely shift to a less bullish posture – if not outright bearish. 
We will also be on the lookout for small-cap strength to begin around mid-December. What used to be known as the “January Effect” of small-cap outperformance can last from mid-December through March. Small caps, notably the Russell 2000 Index has been lagging and remains under water since its November 2021 high. However, since the October low the R2K looks like it’s bottoming and setting up for a more typical seasonal mid-December rally.
Our Free Lunch strategy targets early-December tax-loss selling and yearend seasonal strength. The Free Lunch Basket will be compiled after the close on December 15, 2023, AKA Triple Witching Day, and emailed to subscribers before the open on Monday, December 18. Most likely it will be out on Saturday afternoon.
For 2024, we are also bullish. Politics aside, a sitting president running for re-election is the most bullish of scenarios as you can see in the chart below which appears on page 11 of the 2024 Almanac. There is strong historical evidence that incumbent administrations do everything they can to stay in power. 
When a sitting president is running for reelection S&P 500 averages a gain 12.8% in election years since 1949. This is substantially better than when there is an open field with no sitting president in office running, culminating in a loss of -1.5% on average for the year. The market hates uncertainty and with a sitting president running there is a good chance market, economic and civic conditions will likely remain unchanged whereas with an open field there are a great deal of unknowns. 2024 has that power of incumbency going for it.
[Election Year Chart]
We see the uncertainty but remain bullish until the market signals otherwise. 2023 has been a nearly textbook pre-election year for S&P 500 and NASDAQ following the anticipated mid-term year 2022 bear. AI could be the innovation and driving force for market gains in 2024 and beyond just as indoor plumbing, the combustion engine, automobile, microprocessor, PC, internet, cellphone, etc., powered the market higher in previous secular bull markets.
We remain bullish for the rest of 2023 and expect a proper Santa Claus Rally. The prospects for the market in an election year with a sitting president running for reelection are bullish. At this juncture we expect 2023 to finish strong after a flat first half of December and gains in the 8-12% range for 2024.
Pulse of the Market
With nearly five weeks passing since DJIA bottomed on October 27, and closing at a new recovery high today, it feels relatively safe to say that October was a turnaround month once again. DJIA’s November surge has vaulted it back above its 50- and 200-day moving averages (1). DJIA’s 8.8% November gain has quickly undone the bearish “death cross” that existed for two trading days around mid-month. The subsequent bullish “golden cross” has been accompanied by continued gains. As a reminder, a death cross forms when the 50-day moving average falls below the 200-day moving average and a golden cross occurs when the 50-day moving average rises back above the 200-day moving average.
As of yesterday’s close, November 29, both the faster and slower moving MACD indicators applied to DJIA were fading as momentum waned (2). Today’s gains, not shown in the chart, will aid in reversing that trend. Although we do not use these signals in the Tactical Seasonal Switching Strategy portfolio now that the “Best Months” are underway, they could prove useful for anyone looking to trade typical early-December weakness.
[Dow Jones Industrials & MACD Chart]
After struggling through August, September, and October, DJIA (3), S&P 500 (4), and NASDAQ (5) have advanced for four straight weeks. This is the first time in 2023 that all three indexes have advanced together for four weeks. Strength across all three, at the same time, is encouraging and suggests further gains are likely. But we also do not expect this winning streak to continue indefinitely. There will be another down week or two, perhaps in the first half of December. 
Market breadth over the past four weeks has been generally bullish with Weekly Advancers outnumbering Weekly Decliners in three weeks (6). The week ending November 10, was the one exception despite all three indexes recording solid weekly gains. Overall, market breadth suggests that there is broad participation in the rally.
The trend of Weekly New Highs and New Lows is also supportive. Weekly New Highs have been trending higher since the end of October while Weekly New Lows have retreated dramatically, from 787 to 58 last week (7). A continued rise in the number of New Weekly Highs would confirm a rally that has legs and is broadly supported.
In response to cooling inflation metrics and growth outlooks, the 30-year Treasury bond yield has retreated nearly as quickly as it rose. After peaking at 5.02% in late October, it declined to 4.57% last week (8). The 10-year Treasury has also had a similar decline in yield. The declines in interest rates are aiding stocks. As long as yields are not rising, the market has one less concern to overcome.
[Pulse of the Market Table]