Market needs a Santa rally as Dec returns drop to a 32-yr low

In the last 43 years, December has only had negative returns 11 times, the fewest for any month of the year, according to a Mint analysis. To avoid this somewhat rare occurrence, the benchmark Sensex must gain at least 6% this week.

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Equities across the world tend to rise in the last week of December in a so-called ‘Santa Claus rally’. But this year, markets have whipsawed on fears of the resurgence of covid and recession worries, with the Sensex falling 1.6% on Friday. As a result, markets will need a strong recovery to match the typical gains of the season.

The Sensex has lost 5.2% so far this month, the worst showing for December in 32 years. The last time the bourses saw a selloff in December was in 2018. In contrast, the index gained 2.1% in December 2021 after the covid-era liquidity slush, and 8.2% in December 2020.

On average, December gives returns of 3.5%, besting the gains in any other month over the last 43 years. This was followed by September with a median 2.7% return. March has the lowest median return of -1.4% during the analyzed period.

“The fall has definitely diminished hopes of a market rally similar to what investors enjoyed last year,” said Anand Varadarajan, director of Asit C Mehta Financial Services Ltd. In 2021, the last two weeks of the year yielded 2.2% returns, while it was 2.3% in 2020.

He expects the recovery could take a little longer than earlier expected. “The upward revision of US GDP numbers has raised chances of sharper-than-expected increase in rates by the Fed, which is creating downward pressure on global equity markets.”

So far, markets have delivered 2.7% returns this year, ending its three-year double-digit winning run.

In the past 43 years, while December has seen 11 instances of negative returns, the months of June and July came close with 15 and 14 instances, respectively. March has witnessed the maximum number of declines, 24 times, in the frontline index, followed by October and January, with 22 each, respectively.

The bearish fundamentals have dashed the hopes of a ‘Santa rally’ in global markets, too. The S&P 500 index is down 6.3%, and Germany’s DAX has declined 3.4% in December so far. Both these indices had posted healthy gains last year during the month.

“It might be due to the December tax-loss harvesting for locking in the losses for tax purposes since it is year-end in the US and for most FIIs,” said Vikas Gupta, chief executive and chief investment strategist at OmniScience Capital.

However, Gupta is positive on markets for US and Indian equities for the next year. “The economies are strong. Despite the Fed rate hike, the US economy is likely to grow at 0.5%-1% in real terms. The Indian economy is likely to grow at 6%+ in real terms.”