The week before Christmas also captures much of the end-of-the-year adjustments from institutional players seeking to close their books before the Christmas holiday. The week after Christmas usually comes with much lower volume, suggesting that institutional players have withdrawn from the market for the rest of the year. Many individuals will see the most benefit from long-term investing in diversified mutual funds. 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.
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. A larger-than-expected increase in interest rates or signs that inflation was hotter than anticipated could fuel stock-market jitters toward year-end. 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.
However, market commentators will sometimes use the phrase to describe any rally that takes place around the end of December. If history is a guide, stock investors may be poised to get a gift over the holidays. For the average return of the week leading up to Christmas, the so-called Santa Claus rally, we calculated a +0.385% total return, with 13 winning weeks, five losing weeks, and two unchanged weeks. More important, the average winning week gave a +1.85% return, while the losing weeks averaged a -3.28% return, skewing the risk/reward ratio against the trade (being long S&P 500).
What a Santa Claus rally means for investors
The first appearance of the term “Santa Claus rally” came in 1972 when market analyst Yale Hirsch discovered that market returns were abnormally high in the days after Christmas and leading up the first few days of the New Year. Some investors may be executing tax-loss harvesting and repurchases or investing year-end cash bonuses into the market. To some investors, January may also be the best month to begin an investment program or follow through on a New Year’s resolution. Historically, the Santa Claus Rally has occurred 76% of the time between 1950 to 2019. According to the 2019 Stock Trader’s Almanac, the market has risen an average of 1.3% each year during that period.
- Bonds, typically a ballast when stocks are down, have also been in the doldrums; the Bloomberg U.S. Aggregate bond index, a barometer of U.S. bonds, is down 11% in 2022.
- A seven-trading day period starting Dec. 24, 2008, and ending Jan. 5, 2009, saw the S&P 500 gain 7.36%.
- While we can expect Santa Claus to deliver presents on time, we can’t expect him to always deliver reliable stock-market gains.
- After studying the returns of both scenarios, we believe the Santa Claus rally, to the extent that it exists, occurs in the week leading up to Christmas.
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. Bonds, typically a ballast when stocks are down, have also been in the doldrums; the Bloomberg U.S. Aggregate bond index, a barometer of U.S. bonds, is down 11% in 2022. Whatever the reason for the Santa Claus rally, investors can use a bit of good news.
The unlikeliness of the government or regulators announcing any bad news during the holidays may be the driving force behind this optimism. 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. According to Yale Hirsch, the first two trading days in January are included in the rally. Investors may buy stocks in anticipation of the rise in stock prices during January, otherwise known as the January Effect. The January Effect is believed to be the result of tax-loss selling in December to lock in losses, followed by repurchases in January, in compliance with the 30-day ‘wash-sale’ rules set by the IRS for taking capital losses.
How Frequently Do Santa Claus Rallies occur?
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. 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. There are many explanations for why Santa Claus rallies occur, but it is hard to pinpoint the exact reasons. That said, the media may loosely label what it refers to as a Santa Claus Rally that starts as early as Black Friday (the day after Thanksgiving) and continues throughout the month of December.
It’s not fully clear whether it’s purely psychological or there are some underlying financial reasons for the year-end rally, but history has shown that stocks tend to gain at the end of the year and into the first days of January. Interestingly, the Santa Claus rally is observed in stock markets around the world. For example, the Indian stock market exhibits a similar effect, where the last five trading days of December and the first two trading days of January tend to produce higher average returns than other days. 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. Others insist that the Santa Claus Rally is related to increased holiday spending.
Historically, this seven-day period has brought good news for investors, giving them another reason to cheer during the holiday season. Some believe that the rally is caused by the temporary bullish optimism of investors relaxing with family or from retail investors investing their holiday bonuses. There are also more general calendar trends called the ‘holiday effect’ or the ‘long-weekend effect’ where the stock market is theorized to perform better than average before https://www.fx770.net/ holiday periods. This could be because lighter trading volumes during these periods make it easier for bullish investors to move the market. A ‘Santa Claus Rally’ is a term used to describe the phenomenon where the stock market jumps in value during the last week of December and into the first two trading days of the new year. There are a number of theories as to why this happens – from tax considerations to investors buying stocks with their holiday bonuses.
The Bankrate promise
Most estimate these rallies happen in the week leading up to the Christmas holiday, while others see trends that begin Christmas Day through Jan. 2. Like the jolly bearded man it is named after, no one knows the definitive reason why a Santa Claus Rally arrives in December and often gifts investors with positive returns through the holidays. Stocks usually rise over the last five days at the end of the year and the first two days of the following year. Based on the results since 1994, the behavior of stocks during the Santa Claus rally is also usually an accurate predictor of the direction of the stock market for the following year. There’s also the argument that holiday shopping can bolster businesses’ bottom lines and help boost stock prices. Some of the theories that aim to explain both the Santa Claus rally and the January Effect have received criticism.
After studying the returns of both scenarios, we believe the Santa Claus rally, to the extent that it exists, occurs in the week leading up to Christmas. A Santa Clause rally is observed if the stock markets gain in the last five trading days of the year, going into the first two trading days of the following year. Depending on when weekends fall in a particular calendar year, the start of a Santa Claus rally could be before or after Christmas Day. Some researchers believe one reason for the Santa Claus rally is bullish investors’ sentiment as people are generally optimistic around the holiday season.
Similarly, corresponding trading days in 2007 saw the S&P 500 drop 2.5%, and 2008 saw the Great Recession. 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%.
Santa Claus rallies may or may not last through the remainder of January and on through the year. For example, despite a strong Santa Claus rally at the end of 2008 and early 2009, the S&P 500 lost nearly 11% between the end of the rally and the end of January.
Although there’s no clear expectation for the Santa Claus rally, history has shown that stocks often outperform during the end-of-the-year period. However, a Santa Claus rally isn’t always an accurate predictor of gains the next year. In 2021, the S&P 500 gained 1.4% in the seven-day period, but the market peaked on Jan. 3 and entered a bear market in June, falling more than 20% as the Federal Reserve Board aggressively raised interest rates. Yale Hirsch first documented the pattern in 1972, writing in “Stock Trader’s Almanac” that the S&P 500 had gained an average 1.5% during that seven-day period from 1950 through 1971.
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. 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.