Understanding these seasonal trends can provide valuable insights into market dynamics throughout the year and help investors make informed decisions. The Santa Claus rally happens after Christmas, so we can’t clearly attribute it to holiday spending. Still, the period between Christmas and New Year’s, when many people are off work, tends to be busy with shopping activity from returning Relative purchasing power parity unwanted gifts, buying unreceived wish-list items and mining year-end sales. The January Barometer is a theory that claims that the returns experienced in the January stock market predict the performance of the market for the upcoming year.
For the purposes of the Santa Claus rally, the stock market is considered to be the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite. All three seemingly exhibit the phenomenon despite representing different parts of the market and having different makeups over the years. For a year to meet the “rally” definition, returns merely need to be positive. Thus, one can say the market has enjoyed a Santa Claus rally whether the return was 7.2% over that period, as it was in 1974, or 0.0003%, as it was in 2006.
History and Origin of the Term
A Santa Claus rally is a jump in stock prices, observed in the final five trading days of the year, typically starting a day after Christmas and going into the first few trading days of the New Year. Historically, this seven-day period has brought good news for investors, giving them another reason to cheer during the holiday season. A Santa Claus rally in the stock market refers to the tendency for the S&P 500 to increase in the final five trading days of December and the first two days of January in the new year. A Santa Claus rally has occurred 59 times since 1950, according to the Stock Trader’s Almanac. Some market commentators may casually refer to a Santa Claus rally at any point in December.
Additionally, the market has gained during those days in 34 of the previous 45 years, or more than 75% of the time. Critics believe that the perceived Santa Rally may be a result of investors’ psychological biases and the collective desire for positive market performance during the festive season. They argue that the rally may be driven by self-fulfilling prophecies, where investors buy stocks in anticipation of the rally, leading to temporary price increases.
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- Based on the S&P 500, there were 13 weeks with a positive return, five with a negative return, and two with no change.
- Some of the theories that aim to explain both the Santa Claus rally and the January Effect have received criticism.
- Observing the Santa Claus rally is common, but trying to trade the phenomenon is another matter.
Traders should be wary of market talk surrounding the notion of a Santa Claus rally, and stay fixed on the current market environment. While we can expect Santa Claus to deliver presents on time, we can’t expect him to always deliver reliable stock-market gains. The Santa Claus Rally is generally observed during the last week of December and the first two trading days of January, but the duration and intensity can vary.
Contradicting theories further add to the controversies surrounding the Santa Rally phenomenon. Some argue that the rally is driven by year-end tax strategies, where investors engage in buying or selling activities to optimize tax implications. Others propose that it may be a result of window dressing by fund managers, who selectively purchase strong-performing stocks to enhance the appearance of their portfolios. Academic and professional studies have been conducted to investigate the validity of the Santa Rally phenomenon. These studies use statistical analysis and historical market data to examine the presence of a consistent market pattern during the holiday season.
While the Santa Claus Rally has been observed over many years, its consistency can be affected by changing market dynamics, economic conditions, and other factors. It is a historical trend, but market conditions and other factors can influence whether or not it manifests. If it’s that simple, analysts should do us all a favor and promulgate more calendar effects beyond the presidential election year cycle, January barometer and best six consecutive months. More active investors, however, may want to make their portfolios more aggressive to try to make the most of the rally and use the appearance (or lack thereof) of the rally as an indicator for how to invest in the year ahead. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.
How to Strategize Investing During a Santa Rally
Many individuals will see the most benefit from long-term investing in diversified mutual funds. An example of a big Santa Claus rally occurred in December 2008 going into January 2009. A seven-trading day period starting Dec. 24, 2008, and ending Jan. 5, 2009, saw the S&P 500 gain 7.36%. This rally brought some respite to the index that had, until then in the year, dropped more than 40%. Today, market commentators may refer to a Santa Claus rally when the stock market rises during the month of December, particularly around the Christmas holiday. A Santa Claus rally is the tendency for the S&P 500 index to increase over the final five trading days of December and the first two trading days of January.
What a Santa Claus rally means for investors
It is a news headline happening on the periphery but not a reason to become more bullish or bearish during Santa Claus rallies or the January Effect. Some investors use the existence of Santa Claus rallies as indicators for the coming year. If there’s a Santa Claus rally to end a year, the next year is expected to be good. Mercedes Barba is a seasoned editorial leader and video producer, with an Emmy nomination to her credit. Presently, she is the senior investing editor at Bankrate, leading the team’s coverage of all things investments and retirement. After Hirsch wrote about the pattern, it seemed to become part of the investing lexicon by the early 2000s when a number of references were made to the term in the financial media.
In addition, investors who believe in the January effect might hope to bolster their returns by snapping up shares at the end of December that they expect to rise soon thereafter. Another theory is that many corporations hand out annual bonuses at year-end, and all the extra money workers receive gets spent or invested, pushing stock prices up. It’s unusual to see a bump like java developer job description template this occur so regularly, especially given the efficient market hypothesis—the idea that stock prices incorporate all available information ahead of events expected to impact their prices. Each year, when the days are at their shortest and retail workers’ shifts are at their longest, market pundits speculate about the likelihood and magnitude of a year-end surge in stock prices.
The precise cause for a Santa Claus rally is difficult to identify, with different factors impacting markets from one year to the next. Some of the reasons given for a year-end rally include the general optimism around the holidays, people investing holiday bonuses and an increased influence from individual investors. The Santa Claus rally refers to gains in the stock market that often take place at the end of December.
In the 23% of years when a Santa Claus rally did not happen, the S&P 500 recorded a below-average annual return of 4.7% for the year that followed. Regardless of the mechanics behind the rally, it’s an observable effect and it occurs roughly two out of three years, so investors should be prepared to see whether Santa shows up at the end of each year. However, short-term traders may take more action in the hopes of positioning themselves for a rally. They may buy stocks or stock funds ahead of the end of the year and look to sell them once a rally has taken place. Institutional investors may adjust their portfolios during the Santa Claus Rally period, contributing to market movements.
Again, looking at the historical performance of the S&P 500 over the last two decades, we conclude that it is nearly a toss-up between a tangible rally and a normal trading week. Yes, geopolitical events can impact market sentiment and potentially influence the occurrence of the Santa Claus Rally. Other studies have found mixed or inconclusive results, highlighting the challenges of isolating the Santa Rally effect from other market factors and the presence of random market movements. For buy-and-hold investors and those saving for retirement in 401(k) plans, the Santa Claus rally does little to help or hurt them over the long term.
Despite an end-of-year rally from 2021 going into 2022, the S&P 500 also posted its worst total return for 2022 since the Great Recession. Since 1945, the S&P 500 saw a Santa Claus rally that yielded positive performance in the final five trading days of the calendar year and the first two of the new year 77% of the time, CFRA Research found. A Santa Claus rally is a market today’s stock market performance and economic data rally that causes stock prices to increase during the holiday season, typically a seven-day period beginning the day after Christmas and ending on the second trading day in the New Year. Some market observers may also make forecasts based on whether or not a Santa Claus rally occurs. The tech bubble ended up bursting in early 2000, and 2008 produced one of the worst years for the stock market in decades as the economy plunged into recession amid the subprime mortgage crisis. One is that stocks rally in the week between Christmas and New Year’s, and that carries into the second day of trading in the New Year, usually Jan 2.
Therefore, careful analysis and selection of stocks are essential during this period. Not only that, but it achieved this finding using a less-generous timeframe that aimed to eliminate the positive influence of a possible January effect. It only analyzed returns for the four or five trading days, depending on the year, between Christmas and New Year’s. Some observers posit that the Christmas holiday means fewer large institutional investors are actively trading.
