Will the Fiscal Cliff Keep Santa Away from Wall Street?

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A “Santa Claus Rally” is known as a rise in stock prices during December, typically seen over the final week of trading before the new year. With the milk and cookies long gone and the gifts unwrapped, many investors are anxiously waiting for Santa to visit Wall Street on his return to the North Pole. However, the fiscal cliff may deliver Mr. Market a lump of coal this year.

Heading into the final weekend before Christmas, stocks declined across the board. The Dow Jones Industrial Average and the S&P 500 both logged their biggest one-day loss in over a month as the political actions taking place in Washington D.C. landed on the naughty list. Due to a lack of support among his own party, Republican House Speaker John Boehner canceled a vote on his own plan to dodge a tax increase for the majority of Americans. After pulling the bill without a vote, Boehner dismissed the House until after Christmas, raising doubt that the two political parties will be able to reach some kind of a deal before the beginning of January.

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The seemingly endless fiscal cliff continues to weigh on financial markets this week. On Monday, stocks declined in a shortened session and placed hopes for a Santa Claus Rally on thin ice. The pullback was not severe, but seven of the S&P 500’s ten sectors traded in the red. It was also the worst Christmas Eve performance for stocks since 2006.

According to Bespoke Investment Group, a market research firm, the S&P 500 should be enjoying a nice holiday lift around this time of the year. Seasonal trends dating back to 1928 show that December 24 is one of the best trading days in the month, with stocks climbing higher about 70 percent of the time. Furthermore, the S&P 500 has typically posted gains on nine of the final ten days of the year with an average return of 1.82 percent.

The chart below details the Santa Claus Rally:

Screen Shot 2012-12-25 at 11.56.39 PM

On Wednesday, stocks edged lower even as President Barack Obama remains optimistic that the fiscal cliff can be avoided. Following Boehner’s failed Plan B, Obama said, “I want next year to be a year of strong economic growth…call me a hopeless optimist, but I still think we can get this done.” Obama also cut his Hawaiian holiday vacation short in order to return to Washington D.C. and fiscal cliff negotiations.

Looking ahead, there is still hope for a fiscal cliff deal as politicians typically wait until the last possible moment to complete tasks. Furthermore, the best day for the Santa Claus Rally has yet to come. According to Bespoke, December 30 has historically been one of the best days of the year for equities, averaging a gain of 0.51 percent with positive returns 70 percent of the time. This year, the date falls on a Sunday, but Santa could work his magic this Friday or on New Year’s Eve.

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