Monthly wrap for November 2018: Will there be a ‘Santa Claus’ rally – or year-end “window dressing’’?

Date: December 3, 2018

  • STI gained almost 100 points or 3.3% over the month but is still 8.4% down for the year to date;
  • Trade concerns, rising interest rates, falling oil prices, weak technology earnings and rocky Wall St were main factors;
  • A slowing China also contributed;
  • US Fed chairman Jerome Powell hinted that interest rates are close to neutral – or did he?;
  • All eyes on G-20 summit as Trump meets Xi.


After losing 7.3% in October, the Straits Times Index turned in a slightly better performance in November, registering a 3.3% rebound. This helped reduce its loss for the year to 285 points or 8.4%, though close watchers of the local market’s daily trading would know that at the index’s peak closing level for 2018 of 3,615.28 on 2 May – which was also a 10-year closing high – its gain for the year was just above 213 points or 6.3%.

This means that over the course of the seven months that followed that peak, the index has dropped just under 500 points or 13.8%. It has been battered by a variety of worries, the main one being the ongoing trade war between the US and China which has taken so many twists and turns throughout the year that even though the leaders of the two countries met over the weekend at a G-20 Summit in Buenos Aires, nobody is willing to bet that a mutually beneficial agreement will be reached or even if it is, whether it will prove lasting.

The other factors dragging on stocks are rising interest rates – the 10-year Treasury yield stayed above 3% for the whole month – earnings worries mainly in the tech sector, Goldman Sachs’ involvement in Malaysia’s 1MDB scandal and oil prices that have dropped sharply in recent weeks. Perhaps to a slightly lesser extent, a slowing China economy has also contributed to the softness here.

Daily volume has been weak – other than Friday’s last-day, “portfolio rebalancing’’ or “window-dressing’’ push on the STI that yielded turnover of S$1.95 billion, the rest of the month saw business done drop consistently below S$1 billion. In the 3rd week, dollar value was under S$1 billion every day.

There are of course, two sides to every coin and the fall in stocks could be creating attractive opportunities to those looking to buy the dips. The sharp drop in the STI may be tempting “bargain hunters’’ or long-term, buy-and-hold investors, or perhaps short-term punters who buy into the idea that markets, led primarily by Wall Street, might enjoy a “Santa Claus’’ rally as the year draws to a close.

A “Santa Claus’’ rally?

Over in the US, according to financial newspaper Barron’s, the 2019 Stock Trader’s Almanac says that Santa tends to come to Wall Street nearly every year, bringing a short, sweet, respectable rally within the last five days of the year and the first two in January’’ and that this has been good for an average 1.3% gain since 1950, whilst yielding positive returns about 75% of the time since 1969.

“Why the stock market usually rises during that period no one seems to know with reliability. Perhaps some buy ahead of the old “January effect,” before stock prices rise in that month. Others say it’s a time when professional money managers sell for tax purposes and less savvy individual investors buy’’ said Barron’s.

The cautionary note however, is that the US market’s earnings per share estimates for 2019 have slowly but steadily dropped from about 10% growth expected earlier this year to about 7.6%. The latter isn’t bad by historical standards, but the market is generally interested in the trend and the direction, rather than the absolute numbers and the trend isn’t the market’s friend here.

Similarly, Schroders in its December Talking Point said its research showed that stock markets have risen in 79% of Decembers over the last three decades, thus adding some substance to the myth of the “Santa Rally”.

“The “Santa Rally” is a supposed effect of the Christmas feel-good factor, helping stock markets rise at the end of the year, although many seasoned investors remain unconvinced.

It’s unwise to draw firm conclusions from stock market history but in the spirit of festive fun, Schroders analyses the data each year’’ said Schroders.

Whatever the case, day traders and investors in the local market should take note of a few pointers. First, the STI tends to rise or fall ahead of a rally on Wall Street, as it tracks movements in the Dow futures. If the US market does actually perform as the futures contract had predicted, the reaction here the next day is usually then muted, depending on how the futures trade that day.

Second, for those who wish to bet on there being a year-end rally, it would be best to stick to the STI components or the entire index via one or both of the exchange traded funds (ETFs) that are listed on SGX. This is because there is a better-than-even chance that in a year in which stock prices fell more than they rose such as 2018, the index could enjoy a spot of year-ending window-dressing.

Online reference Investopedia defines window-dressing thus:

“Window dressing is a strategy used by mutual fund and other portfolio managers near the year or quarter end to improve the appearance of a fund’s performance before presenting it to clients or shareholders. To window dress, the fund manager sells stocks with large losses and purchases high-flying stocks near the end of the quarter. These securities are then reported as part of the fund’s holdings’’.

Stated differently, window-dressing is “sell the losers, overweight the winners’’ to make oneself look good. Once again, if readers think that it will occur at the end of December, the best strategy would be not to stray too far from the big names within the index, such as the banks, Jardine group and Singtel.

US interest rate hikes – almost done?

On Wednesday last week, US Federal Reserve chairman Jerome Powell said short-term rates were “just below neutral’’, prompting a large rally in stocks on hopes that the rate hiking cycle is close to being completed.

Not all economists accept this reasoning. “If there has been one certainty of late it is the market’s ability to misinterpret Fed Chairman Powell,” Tom Porcelli, chief U.S. economist at RBC Capital Markets, said in a note that was quoted in a CNBC Markets report.

 “The market viewed this as a dovish development. We think this is the wrong interpretation. Powell is not suggesting that since they are just below the range they may stop soon. All he is doing is pointing out an obvious idea.”

In the same news report, Jan Hatzius, chief economist at Goldman Sachs, was quoted saying he still thinks the Fed will hike four times in 2019, which is above the current indications from the Federal Open Market Committee’s closely watched “dot-plot” estimates. The FOMC sets interest rates for the Fed, and the dots represent where each member sees rates.

Where the market saw a major shift from Powell, Hatzius saw only nuance. He characterized the Powell speech as “in line with prior remarks.”