The best time of the year to be invested kicked off yesterday. The Santa Claus rally starts two days before Thanksgiving and continues right up to the end of December.

Since 2000, the Dow Jones Industrial Average has had a negative return only four times over this period. That’s assuming you bought two days before Thanksgiving and closed your position in early January. That’s an 80% success rate. The downside is the historical return is only about 2%, and there may be some bumps along the way.

That begs the question: Why is this such a good time to be invested? The answer is simple enough. Holiday cheer tends to boost expectations for company earnings. December is like four normal months for most retail businesses. A good holiday season can make a big difference to earnings.

The last six weeks of the year are also the last opportunity for wealth managers to improve on their performance. So far, their performance likely hasn’t been the best. 2020 is going down in the history books as one of the most volatile and scary years ever. Many wealth managers have kept investors sitting in cash for months.

But the Dow Jones Industrial Average, Russell 2000 Index, S&P MidCap 400, and S&P 500 all closed at new highs yesterday. If wealth managers don’t buy winners now, they’ll be sitting on a massive underperformance figure at the end of the year.

That never looks good in an up year. If a wealth manager underperforms their benchmark, they don’t get as big a bonus. The worst part is they have to meet with clients in January to explain why they were underinvested. That’s never pleasant. Clients hire experienced people to handle their money so they don’t have to make the tough decisions. When managers fail, it’s hard to justify what they’re being paid.

This year has had some incredible winners, but it’s had a lot of losers too. If a wealth manager wasn’t on the right side of the technology wave, they’re way behind now. The only way to catch up is to go big on the market’s newest best performers.

The fact so many indices hit new highs this week suggests that’s exactly what’s going on. A race is on to capture as much performance before the end of the year as possible. It’s the stock market equivalent of a Black Friday sale. Everyone shows up to get the best deal possible before they’re all gone.

At this time of year, we tend to see a split personality in the market. The worst performers tend to go down even further. That’s because traders take money out of poorly performing shares so they can take tax write-offs in their worst performers.

At the other end of the spectrum, the best performers tend to attract new money. Buyers flock to them so they can take part too. It also looks good on managers’ annual reports if they own some of the best performers, even if they’re only recent purchases. It at least tells clients the managers are trying on their behalf.

This year, we’re also seeing money flow into cryptocurrencies. The sector had a massive blowout run in 2017. Lots of kids went home for Thanksgiving and convinced their parents to buy bitcoin. It more than doubled in six weeks… before crashing in late December and January.

What all this enthusiasm tells us is people don’t want to be underweight as we head towards the end of the year. Having waited all year to get back, many people are afraid they’ll miss out on one of the biggest rebounds in history.

All the best,

Eoin Treacy