Opinion: Lore thinks there’s been a lull leading up to the Santa Claus rallies – here’s what the statistics show

The stock market is not subject to seasonal weakness between now and Christmas.

You may have never heard of a supposed pre-Santa Claus lull on Wall Street. Given the media’s relentless focus on the so-called Santa Claus Race, you could have focused instead on the possibility of stock market strength in the weeks leading up to Christmas.

But you should never underestimate analysts’ appetite for slicing and analyzing data in new ways. And such a piece of historical data shows that, because we’re in the first year of the presidential cycle, stocks will be flat between now and Christmas, which is when year-end strength picks up.

Don’t believe that.

There’s no seasonal reason to expect stock market performance leading up to Christmas to be different from any other five-week period of the calendar. That’s not to say the stock market won’t show weakness in the coming weeks. But if it did, it would have nothing to do with being late November and the first weeks of December in the first year of the presidential cycle.

The accompanying chart, below, focuses on the Dow Jones Industrial Average

going back to its founding period in 1896, measuring its average return between November 17 and December 24. Its average gain over this 5-week period was 0.54 %, compared with an average of 0.72% for all 5-week periods across the entire calendar. If I were to stop the analysis at this point, you would have some basis to think there was a lull before Santa – although the difference of 18 basis points is of questionable statistical significance.

But note the results when disaggregated by the year of the presidential cycle. The first year of that cycle – in other words, this year – produced an average DJIA gain of 0.74% during this pre-Santa period. While a margin of 2 basis points above the overall average is not statistically significant, more importantly there is no reason to expect this year to be a year below the stock market average.

Investment Lessons

However, even if the stock market’s performance in the five weeks leading up to Christmas were statistically different from the long-term average, the model would have to overcome another hurdle before reasonable bet on it. That barrier is the need for a theory that explains why the model should exist in the first place.

I do not know that there is no such explanation in the case of the lull before Santa during the first year of the presidential cycle. And I don’t hold my breath that I will never find it.

That’s because this model, like most seasonal models, is the result of brazen data-mining exercises. As any statistician can attest, when examining data long enough and hard enough, you can make it say almost anything you want.

My favorite example of data mining comes from David Leinweber, head of the Center for Innovative FinTech at Lawrence Berkeley National Laboratory. He found that you could explain 99% of the variation in the S&P 500
+ 0.34%

returns to a simple model containing only four inputs: Avocado production in Bangladesh, US cheese production, and US and Bangladeshi sheep populations.

This is not to say that no seasonal patterns exist. A few do, and they have a solid theoretical foundation.

But most don’t, so you should be skeptical whenever you read or hear about another analyst “spotting” some strange pattern in the stock market. Your first instinct should be to think back to Leinweber’s example and how apparently unrelated to the stock market is butter, cheese and sheep in Bangladesh and the US.

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 contacted at mark@hulbertratings.com.

https://www.marketwatch.com/story/lore-has-it-that-theres-a-lull-leading-up-to-santa-claus-rallies-heres-what-the-statistics-show-11637328804?rss=1&siteid=rss Opinion: Lore thinks there’s been a lull leading up to the Santa Claus rallies – here’s what the statistics show


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