^{PHOTO: WIKI COMMONS}

(It looks like that more than the mythical Santa’, it is the US Fed and its counterparts elsewhere with RBI being no exception chart the course markets may take during the last trading week in December).

It is that time of the year that investors in stock markets usually brace themselves for the Santa Clause rally’ (or Santa Rally in short) to come, lifting markets’ mood and traders’ sentiments everywhere in the world where the equity market worth its name exists. For the uniformed, a Santa rally’, that coincides with the festivities around Christmas, is a belief bordering on superstition among most share market participants that stocks would add fresh gains during the final trading week of December spilling over to the two subsequent trading days of the new year for reasons not known. Market episodes spanning the past few decades show major global indices gaining in value during this period increasing investors faith in Santa Rally’. Some estimates show that the markets gained on an average 1.5% to 2% each varying across geographies during this time of that year(s). Last year too, the Santa rally lifted major global indices with S&P 500 leading the; pack with a gain of over 27%.

Apparently, there is no clear explainer for what triggers a Santa rally’ during the ides of December every year. No analyst worth her/his name has come out with any possible reason so far for the phenomenon. Nevertheless, it was considered as a given that Saint Nicolas, Christmas Father, will pay a visit to the stock market gifting investors with the proverbial rally. However, going by the way the markets have been trending so far in December, investors are likely to miss the customary Santa rally’ this year for reasons that are easy to figure out. All major equity benchmarks - from Dow to Nasdaq to S&P to BSE Sensex - have fallen between 5.38% to 2.50% range till December 19th and 20 th . (See the table given below for details.) The downshift in global indices persisted through the morning trade in the home market with 30-share BSE Sen sex diving over 350 points or more than half a percentage point during the morning trade.

The interest regime, too, joined others the other day by going for higher rates, albeit at the
longer tenure borrowing curve. To say the least, the latest policy moves by major central banks world over have jolted the stock market investors to their head. And anyone who second guesses the central bank's minds may do it at their own peril.

There is apparently more than one explanation for why the Santa Clause rally may give stock markets a miss this year. For one, besides the growing hawkishness’ among the major central banks about the future rate path which will only go up from here, they also keep reminding that the worst is yet to come (for everybody)’ and the economy may move into a contraction, if not recessionary, zone, in the near future. This is despite the prices of essentials – from food to fuel prices cooling off significantly in the last two months, the chief behind the rate hikes and global economic growth moderating considerably.

This is the common line of thinking that connects all major central banks; be it the US Federal Reserve (US Fed), European Central Bank (ECB), Bank of England (BoE) or the Reserve Bank of India (RBI). All of them have signaled that though the pace of rate hikes has slowed from 70 basis points or bps (1 bps is 1/100 th of a percentage; point), to 50 bps they will keep hiking lending rates till the prices are brought under their respective comfort zones. The Bank of Japan, which was the last champion of the low.

The interest regime, too, joined others the other day by going for higher rates, albeit at the longer tenure borrowing curve. To say the least, the latest policy moves by major central banks world over have jolted the stock market investors to their head. And anyone who second guesses the central bank's minds may do it at their own peril. The commentaries that inflation is on a retreat’ and current interest rate cycle has peaked’ all look gibberish as the harsh realities of higher interest rates for longer period that may even land, if not already, major economies in a contraction zone, if not recession, sinks in. The pain points it can create at every level of life look dreadful.

This never ever seen aggressiveness among the central banks sends a clear signal to the stock market participants who care to see it and fail to see it coming; that financial conditions are going to remain tight for a longer period than expected. This means borrowing costs are going to go up further and will remain higher for a longer period. Hence, a market rally would be hard to come when interest rates are moving into restrictive territory increasing the cost of funds for individuals and corporations alike. The net result is everybody’s guess; lower demand and higher borrowing cost will lead to shrinking profit that ultimately will mirror the stock prices of corporations. This is not to say that hawkish Central Banks are the only reason for the market missing a Santa Rally. The other villains include the rising tide of COVID infections in China, which have neighbors like India on high alert, the haze over global economic growth, shrinking exports, rise in the value of the US dollar, last not least the lingering Russia - Ukraine war to mention a few.

Therefore, for the stock market investors who look to turn a new page, the wait has just got longer since a Santa Rally looks distant at this time of the year. However, as the old adage goes, things may come to those who care to wait.
Merry Christmas and a Happy New Year.

Index So far in Dec*
NASDAQ 5.38%
S&P 500 3.72%
DOW 2.93%
BSE Sensex -2.50

As of December 20
Source: Respective exchanges