By William Watts, MarketWatch
Dimension Films/Courtesy Everett Collection
A torrid October rebound that has the S&P 500 on track for its biggest monthly gain in four months might have bulls feeling good again, but history shows the rally might diminish prospects for a “Santa Claus rally” at the end of the year, according to one market analyst.
The S&P 500 /zigman2/quotes/210599714/realtime SPX +1.03% is on track to record a 8.6% jump in October. According to Sam Stovall, U.S. equity strategist at S&P Capital IQ, that’s around eight times the size of the typical October rally, based on data going back to 1945.
In an Oct. 26 note titled, “Stealing from Santa?”, Stovall looked at what a big October jump historically has meant for stock-market performance over the final two months of the year. And he found that an outsize October rally tends to mean the seasonal Santa Claus rally is weaker than usual.
Stovall notes that while history might serve as a guide, it is “never gospel.”
Stock-market bulls can take solace from the “Halloween Indicator,” which refers to the market’s seasonal tendency to produce its best returns between Halloween and May Day. As MarketWatch’s Mark Hulbert notes, a strong September-October performance by the Dow Jones Industrial Average in the September-October period tends to accompany stronger returns for the Halloween-to-May Day period. Read: The best six months for stocks is about to begin.
As for the final two months of the year, Stovall found that in the seven decades since 1945, the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.03% rose 77% of the time, for an average price gain of 3%.
Looking only at the 43 years that saw a positive performance in October, the average rest-of-year return slipped to 2.3%, Stovall found, with stocks advancing over the final two months of the year 74% of the time. On top of that, each increase in the size of the October advance reduced the average price gain and the frequency of the advance for the rest of the year, Stovall said. The worst reading was seen in years that saw a 7% October gain.
In fact, Stovall found, the best rest-of-year results come after an October drop.
The analyst found a similar story when it came to stock-market sectors. Going back to the start of S&P DJ Indices sector data in 1990, Stovall found that in years when the S&P 500 rose in October, the three top-performing sectors tended to lag behind the market during the rest of the year.
Put it all together, and history suggests that stocks will likely continue to climb through the rest of the year, but at a sub-2% pace rather than the “more normal” 3% advance, Stovall wrote. And the confidence in a November-December rise diminishes from 77% to around 60%, he said, while the three best-performing sectors so far—energy, materials and tech—are likely to underperform the rest of the year.
So it isn’t exactly a lump of coal, but the egg nog might have a little less kick.