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Talking Points:

  • The three major US indices gapped significantly lower at market’s open on Tuesday, erasing hope of a Thanksgiving rally
  • Historically the week before Thanksgiving has offered overwhelmingly positive returns
  • Trade wars, poor earnings and global growth concerns were all to blame for the precipitous Tuesday decline

S&P 500, Dow, Nasdaq Approach Correction Territory

Tuesday saw the S&P 500 post its second largest gap lower on record, bested only by the recent drop on October 26th. The shock at the market’s open saw the broad based index briefly enter correction territory before tiptoeing higher. Correction territory is defined as a 10% decline from a recent high. The decline also erased gains for 2018. Similarly, the Dow posted its largest gap lower since 2001.

S&P 500 Price Chart Daily Year-to-Date, (Chart 1)

S&P 500 price chart decline before thanksgiving

Thanksgiving Rally Grows Unlikely

Tuesday’s battering offered a difficult truth for market bulls and Thanksgiving rally believers. Historically, the week before Thanksgiving has offered overwhelmingly positive returns. Since 1993, the week before Thanksgiving saw the Dow end higher 19 of 24 times.

S&P 500 Nears Correction Territory as Hope of a Thanksgiving Rally Fades

For the S&P 500, the week of Thanksgiving has seen the index end higher every time since 2012. Interestingly, it was the best performing week in the second year of the Global Financial Crisis during which the S&P 500 climbed 10.80% over four days.

S&P500 Price Chart Weekly, 2008 – 2009 (Chart 2)

S&P 500 Nears Correction Territory as Hope of a Thanksgiving Rally Fades

Read our fourth quarter equity forecast to see what equity markets may face as the year draws to a close.

The causation behind a Thanksgiving rally is disputed. One frequently cited reason is the absence of large players in the market due to holiday vacations. The thought is that institutional investors are often more bearish than a typical retail trader and thus some downward pressure is removed from the market.

Another often cited cause is the optimism brought about by Black Friday. Should discount sale figures read in robust, they could be taken as a positive leading indicator and bolster expectations for retail companies. A final reason is simple holiday jubilation. While it may seem mundane, some traders point to a general feeling of happiness which impacted their decisions.

Catch up on the context of economic conflicts like the trade war between the United States and China with “A Brief History of Trade Wars.”

Whatever the reason, this week is poised to buck the trend and expose the ‘Thanksgiving rally’ as a fad as opposed to a certainty. Rising rates, trade wars, weak earnings and concern of slowing global growth have unsurprisingly weighed on equity markets and holiday jubilation alone looks unlikely to drive us higher by weeks end.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

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