We're In For A Santa Claus Rally Alright — But It Might Be Subpar: Here Are 5 Reasons Why

The euphoria surrounding a potential Federal Reserve pivot has propelled all risky bets higher, and the upward momentum is expected to strengthen, thanks to the typical year-end Santa Claus rally. However, the upside may not have been of high quality, rendering this year’s “Santa Claus” rally lackluster, as reported by the Financial Times. 

Here are five reasons why:

1. The “Magnificent Seven stocks,” a collective term for seven of the biggest tech stocks, underperformed small-cap stocks last week, the report stated. The Invesco QQQ Trust QQQ, an exchange-traded fund tracking the performance of the 100 largest non-financial tech stocks, rose 3.36% in the week ending Dec. 15, compared to the 5.50% gain of the Russell 2000 Index of small-cap stocks.
2. The FT report highlighted that Goldman Sachs’ custom indices of unprofitable technology companies and the most heavily shorted stocks surged 8% and 12%, respectively. Struggling electric vehicle truck maker Nikola Corp. NKLA and Carvana Co. CVRN jumped about 27%, despite facing significant fundamental challenges.
3. Companies with weak balance sheets also experienced a rally, the report noted. 
4. Additionally, Special Purpose Acquisition Companies (SPACs) — otherwise known as blank-check firms — rose 3.7% last week, extending gains since October to 20%, as per the report.
5. Finally, the surge in cryptocurrencies last week, following a short period of lull, also raises questions about the quality of the rally, FT said.

See Also: How To Invest In Startups

Why It’s Important: The relative outperformance of small-caps comes on the back of steep losses these stocks incurred in 2022 amid the Federal Reserve’s interest rate hikes. A potential Fed easing could benefit small-caps by reducing their borrowing costs and making it easier for them to raise finances.

The “Santa Claus” rally is a term used to describe strong buying that occurs around the Christmas holiday. Officially, the Santa Claus Rally is the upside seen in the final five trading days of December and the first two trading days of January. The buying is supported by year-end tax loss harvesting, investment of year-end bonuses, and the generally positive sentiment that prevails around the holiday period.

The SPDR S&P 500 ETF Trust SPY, an ETF tracking the performance of the broader S&P 500 Index, rose 0.27% to $470.60 in premarket trading on Monday, according to data from Benzinga Pro.

Related Link: Is The Santa Claus Stock Market Rally Real? Here Are The Numbers

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