What to Expect in the Week Ahead (Christmas Holiday, Housing and Manufacturing Data)

Post-Christmas week will come and go without any major earnings reports but investors hungry for economic data will have a few reports to nibble on.

Wall Street will attempt a strong finish to a surprising — and at times frustrating — year for markets during the holiday-shortened week ahead, as 2023 draws to a close.

Investors are currently entering a favorable period for the markets, commonly known as the "Santa Claus Rally" during the final stretch of the year. This term was coined by Yale Hirsch, the founder of the Stock Trader's Almanac, and refers to the tendency for gains in the last five trading days of the year and the first two of the new year. On average, the S&P 500 has gained 1.3% during this time since 1969.

Despite this historical trend, some traders have doubts about the potential for a significant rally due to a recent dovish shift by Federal Reserve Chair Jerome Powell. This shift caused a sharp increase in stocks that some believe may have overextended itself.

Jay Hatfield, CEO at Infrastructure Capital Advisors, expects stocks may run into some technical resistance as they approach those levels. “We're likely to kind of stall out, low volume, to be kept out probably somewhere around this 4,800 level,” Hatfield said. "We would say it's a good time to go on vacation."

In any given year, the "Santa Claus Rally" is more likely to appear than not. But according to Jeff Hirsch, the current editor of the Stock Trader's Almanac, a lack of typical end-of-year gains could be a negative sign for investors going into the next year.

In a recent blog post, Jeff Hirsch stated that "failure to have a Santa Claus Rally tends to precede bear markets or times when stocks could be purchased at lower prices later in the year." He also noted that down SCRs (Santa Claus Rallies) were followed by flat years in 1994, 2005, and 2015, two significant bear markets in 2000 and 2008, as well as a mild bear market that ended in February 2016.

As Jeff Hirsch added, quoting Yale Hirsch's famous line, "If Santa Claus should fail to call, bears may come to Broad and Wall."

If this were to happen, it would be another interesting statistic to consider as we move towards 2024, according to Jonathan Krinsky from BTIG. This year might be particularly susceptible to a downturn during the Santa Claus Rally period, especially considering the recent market surge.

This week, Wall Street will receive a final slate of economic data points that are expected to confirm the downward trend in inflation and a cooling economy. On Tuesday, the October FHFA Home Price Index and S&P/Case-Shiller Home Price Index should give traders further insight into the housing market. The Federal Reserve Bank of Dallas also releases its Texas Manufacturing Outlook Survey for December on Tuesday. Economists forecast a negative 20.5 reading. Index readings of less than zero indicate slumping manufacturing activity in the state. On Friday, the November reading of wholesale inventories, a measure of unsold goods held by wholesalers, is set for release.