The holiday market rally is ruined

Investors are starting to question the existence of Santa Claus… as far as the guy with the big, white, fluffy beard relates to markets, that is. 

Driving the news: Experts are backtracking on the once-sure bet of the "Santa Claus Rally," a phenomenon where markets surge during the last five trading days of a year — which means it starts today — and the first two of the next, according to The Wall Street Journal. 

• As far back as 1972, this period was flagged as a pretty favourable one for stock performance. The S&P 500 has gained during the period for seven years running.

Big picture: This year, the conditions are a little different. Key indexes in both Canada and the U.S. have already done well in the run-up to the holidays, with the S&P 500 up 3.11% so far this month and the TSX/S&P Composite up 1.41%, leaving less room for gains later in the month. 

• Some gains have defied market logic, with lower-quality companies performing particularly well, including “meme” stock Reddit and used-car company Carvana. 

• As companies with underlying problems perform a little too well, investors also didn’t sell off as many losses for tax purposes, meaning fewer shares are available at a discount. 

Why it matters: Stock market performance during the last week of the year is also seen as a good indicator of investor and consumer sentiment, with strong performance signalling confidence in the economy, while a weaker rally signals caution or pessimism.—SB