The 2026 Market: Why Wall Street sees a 12% S&P surge ahead

Introduction to Stocks and Translation & Seasonality [00:05]

• The podcast "Stocks and Translation" aims to cut through market noise and provide essential information for investors.
• This episode focuses on market seasonality, looking ahead to 2026, with a special mention of the "Santa Claus rally."
• The guest is Jeff Hirs, editor-in-chief of the Stock Trader's Almanac and son of Yale Hirs, a market historian who created the first almanac in 1968.
• The Hersh playbook has tracked the influence of specific days, months, and election years on investor odds for over five decades.
• The discussion will cover holiday spending and the AI-fueled super boom.

"And our phrase of the day is the Santa Claus rally. Even if you've heard of it, it might not be what you think it is."

The AI-Driven Boom and 2025 Performance [01:36]

• The current year (presumably 2025 based on context) has been surprisingly good, with the market at the upper end of the best-case scenario despite expectations of a tariff tumble.
• The market has managed to add gains for a third consecutive year.
• The AI-driven boom in the latter half of the year has led to high year-end expectations.
• This boom is driven by multiple factors, including falling interest rates and a strong economy.
• This AI technology is described as a generationally paradigm-shifting technology comparable to the microprocessor, the car, or the interstate highway system.

"Well, I mean it is a lot that uh uh interest rates are coming down. Um the economy is doing well, but I mean this is one of those generational booms."

The Santa Claus Rally and January Barometer [02:49]

• The Santa Claus rally is a Hersh family indicator that tracks the S&P 500's performance over the last five trading days of December and the first two trading days of January.
• The performance during this seven-day stretch can offer insights into the year ahead.
• Jeff Hirs combines this with two other measures into his "January Indicator Trifecta."
• His late father, Yale Hirs, invented the Santa Claus rally and the January barometer in 1972.
• The January barometer states that as the S&P 500 goes in January, so goes the year.
• The Santa Claus rally is an indicator, not a trading strategy, typically seeing modest gains (1.5%) as professionals pick up bargains during a time when many are off.
• If the Santa Claus rally fails, it suggests other forces are at play. Yale Hirs coined the phrase: "If Santa Claus should fail to call, bears may come to Wall."

"It's an indicator. It's not some year-end trading strategy."

Understanding Seasonality and Investor Approach [04:41]

• Seasonality is a factor to consider, not a standalone strategy, contributing about one-third of market returns.
• Investors should consider fundamentals, technicals, monetary policy, and sentiment alongside seasonality.
• When seasonality is not working, it indicates other stronger forces are dominant (e.g., AI booms, economic rebounds, technical breakouts).
• History serves as a guide, not gospel, as nothing works 100% of the time; being right 60% of the time is a benchmark.
• The Stock Trader's Almanac looks for seasonal patterns with a historical consistency of over 60%.

"So, it gives you a little bit of an edge."

Optimal Timing and the MACD Indicator [06:13]

• For investors looking to get in, the fourth quarter is the strongest, with November, December, and January being the strongest months.
• Getting in during October, especially when a turn is seen, is advised, as October is identified as a "bargain month" where bear markets often bottom.
• The MACD (Moving Average Convergence Divergence) is a technical momentum gauge that compares short-term and longer-term moving averages.
• It helps identify when a trend is strengthening, fading, or about to turn.
• Using MACD can improve the consistency of seasonality, particularly for the best six months (November through April), enhancing entries and exits and significantly improving gains.
• The video suggests using faster MACD settings (like 8-17-9) for buy points, as bottoms tend to be more event-driven and happen faster.

"It really adds to the the uh you know consistency of the seasonality. It improves the results uh tremendously."

Small Caps and the January Effect Shift [10:15]

• This time of year typically sees small caps outperform large caps.
• The "January effect," traditionally the tendency of small caps to outperform large caps in January, has shifted, with most of it now occurring in the last two weeks of December.
• This pattern begins to pick up around late October and through Thanksgiving and November.
• The Russell 2000 is being monitored against the S&P 1000, showing a seasonal bullishness in small caps stirring.
• This trend tends to end mid-January into February, so investors should be cautious about holding too long.

"Yeah, something called the January effect, which is used to be the tendency of small caps, stop performing large caps in January."

2026 Predictions and the Presidential Cycle [11:17]

• The S&P 500 forecast for 2026 is an 8% to 12% gain.
• Midterm years are historically the worst in the four-year presidential cycle, with a bare market in 2022 and 2018.
• However, a reset earlier in the year (April tariff tumble) and the AI boom might make the midterm year more bullish than usual.
• While some weakness is expected in Q2 and Q3 (the weak spots of the cycle), this could set up a "bottom picker's paradise."
• The "sweet spot" of the cycle, from Q4 of the midterm year to Q2 of the pre-election year, historically offers significant gains (50% for the Dow, 67% for NASDAQ).
• Factors like fiscal stimulus, deregulation, and an "easy Fed" are shifting the midterm outlook to be more bullish.

"But we did have a reset earlier this year with the April tariff tumble and a bunch of technicians as as we've spoken about thinking that's a reset ourselves included."

The April Reset and New Bull Market Cycle [13:14]

• The April post-liberation day selloff was short-lived, and the market quickly returned to record highs.
• This event, while not a technical bear market (20% decline), felt like one due to widespread fear and selling.
• Such resets can set up new cycles, potentially marking the first year of a new bull market.
• The current period might be the early stages of a secular bull market.
• The VIX spiking over 50 indicates rampant fear and selling, suggesting a need for new market models.
• The market's behavior after breaking resistance levels suggests it is acting like a new bull market.

"Arguably we we may very well be. We're in the the middle or the early stages of the secular bull market which is going to go on for a while."

"Don't Fight the Tape" vs. "Don't Fight the Fed" [15:26]

• "Don't fight the tape" is considered more important than "don't fight the Fed," as price action is the ultimate arbiter and reflects all known information.
• The market is not emotional; if it's going up, there's momentum.
• The current period is within a seasonal sweet spot, and the Fed is expected to ease policy, adding to positive momentum.
• There is still doubt and skepticism about the current bull market, with concerns about the AI story and potential Fed actions.
• This skepticism, or "wall of worry," can be bullish as it means bears are on the sidelines.

"Don't fight the tape. It's all on the charts. Everything's figured in there."

Central Banker Comparison: Volcker vs. Powell [18:27]

• A comparison is made between Paul Volcker, the "silent enforcer" of the early 1980s Fed, and Jerome Powell's current "chattier" Fed.
• Volcker's era is characterized by high interest rates (20%) to combat inflation, with a Fed that mostly let bond markets speak and intervened with significant moves only when necessary.
• Powell's Fed inherited a more talkative approach and uses forward guidance extensively.
• Volcker is favored due to the benefit of hindsight and the current Fed's over-reliance on communication rather than listening to the bond market.
• The Fed was created as a guardrail for the bond market but has become a forecasting body.
• A quote from 1981 minutes shows Volcker's Fed focused on making adjustments based on bond market movements, not dictating them.

"Well, Mr. Vocal does get the benefit of hindsight, but I would I would vote vote Vulkar."

Navigating Market Noise and Focusing on Price Action [20:48]

• Tools like the CME FedWatch tool and prediction markets highlight the increased focus on Fed actions and rate cuts.
• Investors are advised to "turn it off" and "put your phone down" to avoid external noise.
• Focusing on fundamentals and, crucially, "the tape" (price action) is recommended.
• Candlestick charts are valuable for identifying key levels and reading the emotion (greed, fear, worry) within the market.

"Turn it off. Put your phone down."