A Santa Claus rally is the sustained increase in the stock market that occursaround 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.
Theories that explain a SantaClaus rally include end-of-year tax considerations, a general feeling of optimism and seasonal happiness onWall Street, and investing holiday bonuses. Someinstitutional investors settle their books and vacation during this time of year,leaving the market to retail investors, who tend to be more bullish toward the market.
Key Takeaways
- The Santa Claus rally is the tendency for the stock market to increase during the Christmas season.
- Theories for the rally include increased holiday shopping, seasonal spirit, and institutional investors settling their books before going on vacation.
- Like many market anomalies, the Santa Claus rally may be random with no future guarantees.
Historical Data
Yale Hirsch, the founder of theStock 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.
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%.
During the 2022-2023 Santa Claus Rally, which included the final five trading days of December 2022 and the first two of January 2023, the S&P 500 rose 0.8%.
December
When investors consider data that spans 20 years of performance of the in the week leading up to Dec. 25 from 2002 to 2022, there is minimal evidence of any discernible Santa Claus rally. Based on the S&P 500, there were 13 weeks with a positive return, five with a negative return, and two with no change. The range spanned +5.4% in 2021 to -10.7% in 2018.
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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.
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 theJanuary Effect. Some research points tovalue stocks outperforminggrowth stocksin December.
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.
Trading the Santa Claus Rally
Traders pay attention to cyclical trends and find ways to exploit historical patterns. But it's always a relatively random proposition, and the Santa Claus rally is no exception. Investors monitor their risk and reward via position-sizing and stop orders if positions go against them.
Observing the Santa Claus rally is common, but trying to trade the phenomenon is another matter. Investors should be mindful of rules in trading during this period. Strategies may include a stop-loss level and a plan for what to do if the trade is neither profitable nor stopped out by Christmas.
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. It isa news headline happening on the periphery but not a reason to become more bullish or bearish during Santa Claus rallies or the January Effect.
What Causes a Santa Claus Rally?
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. 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.
What Is the January Barometer?
TheJanuary Barometeris a theory that claims that the returns experienced in the January stock market predict the performance of the market for the upcoming year.
How Was the Idea of the Santa Claus Rally Introduced?
Yale Hirsch followed stock market history and patterns and founded the Stock Trader’s Almanac in 1968. The almanac introduced the public to statistically predictable market phenomena such as the “Presidential Election Year Cycle”, “January Barometer,” and the “Santa Claus Rally."
The Bottom Line
Long-term traders should view holiday-season price action for what it is: A toss-up amid low market liquidity, with little or no predictive power for the coming weeks. End-of-month and end-of-year position adjustments can produce highly volatile market movements. While some pundits see it as a Santa Claus rally or the beginning of the January Effect, investors should consider individual goals and risk tolerance before following a market phenomenon.
