Holiday Lights and Market Insights: What History Really Teaches Us

Historical patterns may inspire confidence, but Wall Street rarely gives guarantees. Learn why doing your homework beats relying on seasonal stats.

Yes, no, probably, maybe. We have now passed through the deepest darkness. It’s true, the longest night of the year for the Northern Hemisphere was on December 20^th. And, I would say one of the lightest days of the year was yesterday where two holidays characterized by light fell on the same day—a rare event. We love rare events on Wall Street, if you haven’t noticed.

Of course, I am referring to the first night of Hannukah and Christmas falling on the same day for the 5^th time since 1900. It is a rare occurrence, but here is the thing, analysts could have forecasted that with 100% accuracy long before it even occurred. A year ago, 10 years ago… even 1000 years ago. Wow, now that is an analyst I want working on my market predictions. STOP, I am setting you up for a joke, if you haven't already picked up on it.

It is easy to tell when Hanukkah and Christmas overlap! Why? Because Jewish holidays are based on the Lunar Calendar while most of the rest of the world’s holidays are based on the Gregorian Calendar. Hanukkah always falls on the 25^th day of the month of Kislev on the Lunar Calendar, while Christmas always falls on the 25^th Day of December on the Gregorian Calendar. Knowing this, we can calculate future overlaps of those two days for a long time—a long time into the future.

Unfortunately, the same accuracy of prediction cannot be attained in the stock market. Why am I telling you this? You may not know the details, but if you have been involved in the markets for either 1 week or 75 years (I fit somewhere in the middle 😁), you have probably learned that the market rarely does what is convenient for your personal situation. As it is near the end of a very good year for stocks, many armchair statisticians (well paid) have taken to their spreadsheets to give you facts about what might happen next month, next year, etc. based on market behavior last month, this month, this year, etc. I even read something early this morning about how the market will behave in January if a Santa Claus rally happens in the next few sessions.

The quote read something like “every time the markets went up x% in the period between Christmas and New Year, stocks gained more than y% in January, and z% in the following year!” Imagine that. Why then are so many traders taking those days off, knowing these impressive historical numbers? You would think everyone would be glued to their Bloomberg’s until 3:59 PM Wall Street Time on January 31^st in order to calculate the gains of the prior few days with one thumb on the calculator and the other on the BUY button. Unfortunately, my friends, it is not that simple.

Looking back 20, 30, 40, or how even many years you want, calculating gains in December and January, and telling me that on certain years of December gains, January gains were, on Average, so and so, is simply reciting what we refer to as descriptive statistics, meaning simply describing observations. They mean absolutely nothing, on their own. There is a famous saying in the academic world: "correlation does not imply causation!" I took the liberty of adding the exclamation point. It means that simply observing that December gains were historically followed by January gains does not mean that there is a causal relationship.

If we applied real statistics, we could use the conditional probability equation which looks like this:

We know that the S&P500 gained in 23 out the past 30 years, which is 76.7% of the time, and we know that both December AND January had positive closes 15 times, or 50% of the time. We can do the fancy math and come up with a statement that the probability of January after (conditional on) a December gain is 65.2%. Now, that may give you some comfort, if you are good with only a 65% chance of winning, but there is more. We might want to know with confidence just how good our odds might be. There is some more fancy math that I can show you (but I won’t 😊) that would tell us that we can be 95% confident that the chances will be between 46.4% and 84%. If you have been following this, you may have just realized that we can’t say with 95% confidence that we have better than even odds, meaning there is a chance that we may not have the desired results! It’s just math, stupid.

Don’t get nervous. I showed you all of this with a bit of levity, because the holiday spirit still fills my heart. In that same holiday spirit, I want to warn you to take silly statements about the market at face value. There are no guarantees on Wall Street, just historical observations. Now, don’t get me wrong, we can learn from history. How markets responded to stimuli in the past gives us an understanding of how it might behave today but given the large number of participants and factors that drive markets, there is far too much variability to get anything close to be what would be considered a guaranteed result. That simply means, my friends, that you have to do your damn homework, that you have to sometimes accept that you were wrong, and you have to stay in it… to win it… long term, for those statistics to play out.

On that note, did you know that a portfolio based on profitability gained an annualized 15.5% since 2000? You are probably not surprised to hear that. But did you know that that same portfolio only earned around 5% in the last 7 years? Obviously, profitability worked better prior to 2017. In any case, the message here is stay focused. I will try to leave you with something positive, a guarantee of sorts. I am 100% certain that the year ahead will present to us many opportunities to make gains on our investment… it will also provide us with many opportunities to get tripped up. Stay with me; we will get through it together.

TUESDAY’S MARKETS

Stocks rallied earlier in the week with low volumes and wide breadth—an everything rally, reflecting optimism. Consumers are less confident about the future, as in six months from now according to the latest report from the Conference Board. Knowing is everything, and for most consumers, we are about to enter an era of low visibility.

NEXT UP

• Initial Jobless Claims (December 21) is expected to come in at 223k, slightly higher than last week’s 220k claims.

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