Santa Claus Rally: What It Is and Means for Investors
Just like other calendar effects in the stock market, observers disagree over whether the Santa Claus rally is valid or useful. If you’d like to draw your own conclusions, here are some additional points to consider. The holiday season might have investors feeling more optimistic, especially with corporations and governments cryptocurrency exchange for bitcoin, ethereum and altcoins reluctant to announce bad news during this period if they can avoid it.
The term “Santa Claus Rally” has its roots in the early 20th century, although its exact origin and the reasoning behind the name remain somewhat ambiguous. One theory suggests that the term emerged from the tradition of a year-end rally coinciding with the arrival of ‘Santa’ during the holiday season. Another theory attributes the term to the phenomenon of institutional investors adjusting their portfolios before the year-end, leading to increased buying activity convert australian dollar to canadian dollar and upward price movements (therefore playing ‘Santa’ to the markets). This rally is often characterized by a surge in market activity and a general sense of positivity and optimism among investors. Several theories try to explain the Santa Claus rally, including investor optimism fueled by the holiday spirit, increased holiday shopping, and the investing of holiday bonuses.
At least two other academic studies, albeit less rigorous ones, have found that no Santa Claus rally exists. Differences in analytical methods likely exist among various Santa Claus rally studies as well. The study also examined returns in 15 other developed countries, so the total sample included eight countries where a majority of residents identify as Christian and eight where they don’t. The flaw with this theory is that there is no single time of year when most corporations pay bonuses; it varies by company.
Another theory is that this is the time of year when institutional investors go on vacation, leaving the market to retail investors, who tend to be more bullish. 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. Bankrate.com is an independent, advertising-supported publisher sail and sign onboard account and comparison service.
Q. How can investors take advantage of the Santa Claus Rally?
Changes in interest rates can impact investor behavior and market dynamics, potentially influencing the Santa Claus Rally. Economic data, such as employment reports and consumer spending figures, can influence investor sentiment and contribute to the direction of the Santa Claus Rally. The controversies surrounding the Santa Rally phenomenon highlight the complexities of understanding and predicting market behavior.
Historical Data
We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range, can also impact how and where products appear on this site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service.
For example, according to data compiled by LPL Research and FactSet, the Santa Claus rally period in 1999 saw the S&P 500 drop 4% and the Dotcom bubble burst in 2000. Similarly, corresponding trading days in 2007 saw the S&P 500 drop 2.5%, and 2008 saw the Great Recession. Some researchers believe one reason for the Santa Claus rally is bullish investors’ sentiment as people are generally optimistic around the holiday season.
Similarly in 2008, during the stock market crash caused by the financial crisis, stocks actually got a Santa Claus rally in the midst of a larger bear market rally. During the seven-day period, the S&P 500 gained 7.5%, although it would crash again in the first two months of 2009 before bottoming out on March 9. While historical data might seem to support the idea of a Santa Claus rally and what it could signal for the year ahead, it’s worth noting past performance isn’t necessarily a predictor of future returns and not all years have followed this trend. In the last five trading days of 2015 and the first two of 2016, for example, the S&P 500 yielded negative returns, and recorded around a 12% gain for 2016.
Q. Can market sentiment indicators provide insights into the likelihood of a Santa Claus Rally?
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). Remember, investing during a Santa Rally comes with inherent risks, and past performance is not indicative of future results. It is essential to conduct thorough research, assess risk, and make investment decisions that align with your long-term financial objectives.
The Santa Claus rally occurs when stocks rise over a seven-day trading period—starting the last five trading days of a year and continuing into the first two trading days of January in the following year. Some analysts believe that it’s caused by the completion of tax-loss harvesting. Professional investors often adjust their portfolios at the end of the year for tax purposes by selling stocks at a loss. That temporarily pushes down stock prices, but that trend is soon reversed as investors begin buying stocks again, pushing prices higher.
It is important to base investment decisions on careful analysis, risk assessment, and alignment with long-term financial objectives. A Santa Claus rally is the sustained increase in the stock market that occurs around the Christmas holiday on Dec. 25. 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.
Investors may buy stocks in anticipation of the rise in stock prices during January, otherwise known as the January Effect. Some research points to value stocks outperforming growth stocks in December. These seven days have historically shown higher stock prices 79.2% of the time, reflected in the S&P 500. The Stock Trader’s Almanac compiled data during the 73 years from 1950 through 2022 and showed that a Santa Claus rally occurred 58 times (or roughly 80% of the time), with growth in the S&P 500 by 1.4%.
- Yale Hirsch, who coined the term in 1972, held that a Santa Claus rally would occur over the period covering the last five trading days of the year and the first two trading days of the New Year.
- It is important to note that while a Santa Rally may result in overall market gains, not all stocks may participate equally.
- To some investors, January may also be the best month to begin an investment program or follow through on a New Year’s resolution.
- 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.
- Some analysts believe that it’s caused by the completion of tax-loss harvesting.
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. While Santa Claus can be counted on to deliver the presents on Christmas, the stock market cannot be relied upon for gifts. Any positive gain in the stock market around Christmas commonly leads financial market observers to refer to the Santa Claus rally. Yale Hirsch, the founder of the Stock Trader’s Almanac, coined the “Santa Claus Rally” in 1972. He defined the timeframe of the final five trading days of the year and the first two trading days of the following year as the dates of the rally.