Everyobody knows that the Santa Claus rally which traditionally caps every calendar year, has a twofold role: one is to window dress the portfolios of underperforming (which these days means almost all) asset managers who get a 4-5% pick up in "value" not due to their asset selection skills, but because everyone rushes in at the end of the year in a mass buying orgy, thereby making returns seems higher than they normally would be; the second - and more important - is to boost consumer confidence and to encourage that all important American instinct - spending money one does not have to purchase things one does not need, an instinct that kicks in far more easily when one sees the Dow Jones rising every single day heading into the holiday weekend.
But while this is intuitive for most, there actually is a scientific explanation why it has to happen ever year.
According to Evercore ISI "over the past 20 years, there's been an 87% correlation between S&P performance in 4Q and Holiday Sales." As of right now, the S&P in Dec is now on track to be up - a few days ago it wasn't. Furthermore, the S&P is now up +5.5% above its Sep average. If it holds there, the 20-year regression line below suggests that Holiday Sales will be up +5.4%...
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Chart: Evercore ISI
... which is clearly better than just a 2.5% increase, one which would lead to even further reductions in Q4 GDP and concerns the Fed will have to end its rate hikes and go back to ZIRP.
It also means that the rally of the last three days which pushed the S&P higher by 3%, and back to green for the year, was the cheapest and most efficient way to boost retail sales, which feed directly into GDP, by virtually the same amount, and which in turn will be spun by the CNBC's of the world as bullish for stocks, thus closing the feedback loop.
Reflexivity: because it 100% of the time it works every time.
