Relax. Thereâ€™s no need to obsess about a bear market next year even if Santa Claus doesnâ€™t bestow his usual gifts on Wall Street.
Itâ€™s important to point this out because one of the sayings you hear a lot on Wall Street this time of year is â€œif Santa fails to call, bears may come to Broad & Wall.â€ (For those of you unfamiliar with New York City geography: Broad and Wall streets is the intersection outside the New York Stock Exchange.) I have been unable to find any historical support for this saying.
That doesnâ€™t mean a bear market couldnâ€™t happen. Bears are known to visit at any time of year. But there is no correlation between the stock marketâ€™s performance around Christmas and its return in the subsequent year.
Consider what I found upon analyzing the Dow Jones Industrial Average back to its creation in 1896. For all years since then I measured the correlation of its returns in the second half of December with its returns in the subsequent year. As you can see from the accompanying chart, above, the stock market on average does better following late-December losses.
To be sure, this pattern is not significant at the 95% confidence level that statisticians often use when assessing if a pattern is genuine. So you shouldnâ€™t conclude from this result that you should now be hoping that Santa stays away from Wall Street.
The conclusion you should instead draw is that the stock market in 2021 will have to stand on its own two feet.
I reached those results upon defining the Santa Claus period as the last half of December. But not everyone defines it that way; others donâ€™t believe the period starts until Christmas itself. That certainly makes sense, of course, since itâ€™s not until then that the big man makes his yearly jaunt.
It turns out, however, that I would have reached the same conclusion if I had focused on that week alone rather than the second half of December. There is no statistically significant correlation between the marketâ€™s return during that week and its performance in the subsequent year.
Consider those years in which the Dow Industrials fell from Christmas Eve through the end of the December. On average in the subsequent calendar year, the Dow gained 8.7%. That compares to an average subsequent-calendar-year gain of 7.3% whenever the Dow falls in the last week of December. As before, however, this difference is not statistically significant.
The absence of these patterns leaves us with the mystery of why Wall Street is so worried about whether Santa Claus will visit the stock market. My guess is that the concern became widespread following a handful of years in which a bear market began in December. Wall Street loves to tell stories to â€œexplainâ€ what otherwise is nothing more than statistical noise, so this one caught on.
Regardless, you now know better. Donâ€™t put any more pressure on Santa that he already has.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at email@example.com.