The “Santa Claus Rally” is a phenomenon that warms the hearts of even the most Scrooge-like investor. It describes the historical tendency for the stock market to experience a boost in December, particularly between the last five trading days of the year and the first two of the new one. It’s akin to Santa Claus bringing not just cheer, but also some sweet market gains.
While the Santa Claus Rally has occurred roughly 80% of the time for the S&P500 since 1950, it does not guarantee the following year will hold positive market performance (keep in mind there was a Santa Claus Rally in 2021). There is not one cause for Santa Claus Rallies. In the past, they have been driven by multiple factors, including increased retail trader activity relative to institutional trading, holiday spirits increasing optimism, holiday bonuses being invested, and distributions of dividends and capital gains that are to be reinvested. Any positive market performance around Christmas tends to result in market observers proclaiming a Santa Claus Rally.
Yale Hirsch coined the term Santa Claus Rally in 1972. Hirsch founded the Stock Trader’s Almanac in 1968, where statistically predictable anomalies in the market were introduced to the public. This included the Santa Claus Rally, the Presidential Election Year Cycle and the January Barometer. All of these are events that have statistical significance but can be harder to predict than to observe.
You may ask if you can trade the Santa Claus Rally. While some do attempt to make a quick profit through actively trading during such a rally, such tactics are risky. Many investors are adjusting their portfolios for a multitude of reasons, and with a good amount of institutional trading on hiatus due to the holiday season, trading volume decreases, furthering the risk for higher volatility.
While investors may see some year-end appreciation with a Santa Claus, it may not be prudent to attempt to trade tactically – betting on an uncertain future to make a profit — as this may result in losses and hurt long-term investing goals. At EVOadvisers, we believe that an investor’s portfolio strategy is a component of their broader financial plan, and that investing is a long-term, patient process. If you would like to speak with a Certified Financial PlannerTM professional from the EVOadvisers team, please schedule a time to talk.
Note: This is not a recommendation for or against any investment strategy and does not constitute delivery of personal investment advice. Investing involves risk of loss. Past performance is no guarantee of future results.
Jack O’Brien CIMA® is a Certified Investment Management Analyst educated at Chicago Booth School of Busisness and Virginia Tech. EVOadvisers is a fee-only financial advisor based in the Scott’s Addition area of Richmond, Virginia. EVOadvisers also has an office in Irvington, Virginia to better serve clients in the Northern Neck of Virginia. If you have any questions about financial planning and would like to talk with one of our Certified Financial Planner professionals, check us out at www.evoadvisers.com or call (804)794-1981.