Tuesday, June 6, 2023

US inflation is slowing, which encourages a Santa Claus rally.

The expectation of Santa Claus rally across the world including India has now increased as a result of US inflation data which came in below the predictions of experts. On Tuesday night, US government data showed consumer inflation for November was 7.1%, down from the median forecast of 7.3% and 7.7% in October. The data improved investor mood, leading the Nasdaq Composite to rise 2.5%, the Dow Jones Index to rise more than 1%, and the Nifty, a derivative of India’s Nifty index that trades on the Singapore Exchange, increased by about 1%. , The Santa Claus rally is a term commonly used to describe a rise in the stock market before Christmas.

According to Apoorva Sheth, Head of Market Perspective & Research, SAMCO Securities, investors heaved a sigh of relief as the US CPI for November came in below both the consensus estimate and prior readings. She claims that this brings us closer to the US Fed’s real interest rate change. “The Fed chairman indicated that he may take his time raising rates. Now, this could soon become a fact,” commented Sheth. It will help to experience the bounce.

As mutual funds continue to be net buyers and are inundated with cash from regular investors through SIP channel, the market rally may spread to India. International funds are also joining these institutions; Even though December is usually a slow month for foreign fund managers, they have invested over Rs 8,600 crore in equities this month.

On Tuesday, the Sensex gained 403 points to reach 62,533 points and ended the two-session losing streak. Infosys, TCS and Reliance Industries led the gains. However, selling in companies such as Tata Steel, Maruti and HUL capped the gains to some extent, according to BSE data. However, at least two top foreign brokerages are warning that the Santa Claus boom may not continue till next year in the days to come.

BofA Securities said during the day that they expect a 5% rally in 2023 as the Indian market appears to be overvalued and there is a possibility that Nifty businesses’ earnings may fall due to factors outside India. It has set a December 2023 Nifty target of 19,500 points. Another well-known international trading firm, BNP Paribas predicted that the Sensex will touch 66,000 mark by December 2023, up 5.5% from Tuesday’s closing. Unlike India, Korea and Indonesia, brokerage houses are overweight in China, Hong Kong and Thailand.

What Exactly Is The Santa Claus Rally?

A ‘Santa Claus rally’ refers to the phenomenon in which the stock market increases in value during the last week of December and the first two trading days of the new year. The idea originated in American markets. Although the reasons for this surge are controversial, it is often attributed to increased buying activity by investors seeking to take advantage of year-end tax benefits, given that the US operates on a calendar-year basis, with as well as a general sense of optimism. during the holiday season.

Positive gains are common in the stock market during the last five trading days of December and the first two trading days of January, although this is by no means guaranteed. Yael Hirsch first saw it in a 1972 edition of The Stock Trader’s Almanac.

Between 1950 and 2019, Santa Claus rallies occurred 76% of the time. According to the 2019 Stock Trader’s Almanac, the market has risen an average of 1.3% every year during that period. Since 1993, Santa rallies have taken place about two-thirds of the time.

“Historically, the S&P 500 has ended positive 76% of the time over the past 45 years, indicating that the rally is real. As a result, whether you believe in a Santa Claus rally or not, it’s hard to dispute that this has generally been a strong period for the stock market,” said Vaibhav Jain, Head of Wealth Management Partnerships and Sales, WealthDesk. Some experts believe that a Santa Claus rally predicts market performance for the entire subsequent year, yet there is no strong evidence that this occurs.

There is no clear reason for the Santa Claus rally, although there are a few possible explanations for the stock market gains that week: Trading activity is often low as institutional investors take the week after Christmas. Retail investors, who tend to be more optimistic, have more clout in the market. The January effect occurs when investors buy equities in anticipation of a rally in January. In late December, investors would have started reinvesting tax loss harvesting funds. The week between Christmas and New Years is filled with hope and optimism for the year ahead.

“Trading volumes are expected to remain low in the last week of December due to FIIs and foreign fund managers leaving for holidays, and Q3FY23 fueled by Christmas sales is considered a favorable opportunity among domestic investors ahead of Q3 results release goes. Hence, we expect DIIs to utilize this opportunity and retail investors will look for a potential bounce towards the end of the year,” agreed Anmol Das, head of research at Teji Mandi, a subsidiary of Motilal Oswal Financial Services.

Santa Claus Rally, Holiday-Short Week: What to Know in the Week Ahead

Trading volume is expected to remain low in the last week of December due to FIIs and foreign fund managers going on vacation. Domestic investors view the strong third quarter of FY23, which was fueled by holiday sales, as a favorable opportunity ahead of the release of Q3 results. Hence, we anticipate that DIIs will seize the opportunity and retail investors will eye a potential rally towards the end of the year. In India, but during the last two years, Indian markets have also seen a slight year-end recovery.

Stocks across industries including energy, finance, healthcare, infotech, power and telecom are likely to get impacted at this time. Banking and finance sector, cement, FMCG and technology stocks are likely to rise especially for this season, due to the market sentiments around these stocks during the holidays. “Investors can see a rally in the price of equities in several industries during the Santa Claus Rally, including technology, consumer goods and healthcare.

Because investors are confident in the future and willing to take on more risk in pursuit of greater rewards, these sectors often perform well. By carefully examining firms in these industries and looking for stocks that are poised for growth, retail investors can benefit from this boom, said Mayank Mehra, principal partner and small case manager at Craving Alpha.

Anmol Das, head of research at Teji Mandi, a subsidiary of Motilal Oswal Financial Services, said, “A solid third quarter of FY23 is on the way.” “This quarter is expected to be tremendously good for retail consumption, FMCG, QSR, and automobile and OEMs, with PSU banks continuing their performance.”

Does the rally of Santa Claus in America mean for India too?

The Santa Claus rally is not specific to any one country, and equities in India often see a similar effect. Even if the US market is looking bullish, it is difficult to dismiss the fact that the US is a market driver and there has been a moderate to strong correlation between the daily returns in the US and Indian markets. According to Jain, since every rise or fall in the US market will affect Asian and other markets the next day, it is quite relevant for India.

In the last nine out of the last ten calendar years, the Indian Nifty index has seen an upward pattern in the last two weeks of the year. “Historically, in nine out of the last ten calendar years, the market posted gains in the last 15 days of the year. To put this boom into perspective, not even the S&P 500 could pull it off over the past ten years. As a result, a Santa Claus rally is also possible in India,” commented Abhinay Sharma, managing partner, ASL Partners.What is a Santa Rally, and will we be having one this year?

The Nifty 50 gained 2.2% in the last 15 trading days of 2020. In 2019, the 50-Pack Index returned 1.7%, compared to 0.5% in 2018, 1.9% in 2017, and 0.6% in 2016. Sharma said it fell 1.9% in 2011. Additionally, while overseas mutual funds are getting flooded with cash from general investors who remain net buyers, the market boom could spill over to India.

“FIIs, who are mainly driving our markets, are on holiday, although the excuse of year-end tax benefits does not apply here. As a result, volumes are modest, with individual investors — who are often bullish and net buyers — making up the majority of participants. Over the past 20 years, the Nifty 50 has risen 80% historically in December, averaging 3.2%. It appears that the Santa Claus Rally has relevance for India as well.

It is uncertain, however, if Indian markets will follow the lead of their international counterparts by the end of the year as market participants become aware of the decoupling principle, Jain said. There is a chance of inflows as some motivated investors invest internationally, especially in emerging markets like India. As a result, their favorable attitude may extend to domestic investors. Foreign investors often allocate more money to India’s banking, consumer discretionary, energy and IT services sectors. Thus, they could experience the effects.

However, many domestic and international market variables interact to affect net trading activity. According to Prateek Pant, chief business officer, WhiteOak Capital Asset Management Ltd, for example, the January effect, when investors buy equities in the new year after the year-end selloff, counters the Santa Claus surge.

Retail investors need to know that a Santa Claus rally is not a guarantee and stock prices may decline during this time. “Before investing, it is important for investors to thoroughly weigh the risks and potential returns. Investors should also be aware of the potential effects of events such as the ongoing COVID-19 pandemic, which could affect stock prices and market conditions. can affect,” said Mehra.

Will investors be gifted with a Santa rally?

“Indian individual investors should think of investing only from the point of view of long term wealth growth and should not get distracted by such short term market fluctuations. Investing is a marathon, not a 100 meter race. Choose the right investments, Practice patience and invest regularly. Long-term market returns generally hover in the mid-teens, given India’s nominal GDP growth rate and long-term corporate profitability growth,” said Prateek Pant, chief executive at WhiteOak Capital Asset Management Ltd. The business executive said. Retail investors should use historical data to identify patterns, and then diversify their bets on a portfolio of companies that represent the theme can be a successful trading method for retail investors.

Edited and proofread by Nikita Sharma

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