Santa Claus rally: A holiday stock market boost

what is santa claus rally

However, market commentators will sometimes use the phrase to describe any rally that takes place around the end of December. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. Financial columnists and traders like to opine on the likelihood of a Santa Claus rally. Some cite economic and technical analysis, and others offer pure conjecture. Historically, during a Santa Claus Rally, the S&P 500 has risen an average of 1.3% but it doesn’t happen every year so it isn’t 100% predictable.

Whatever the reason for the Santa Claus rally, investors can use a bit of good news. The market generally responds positively to divided government due to the relative predictability that comes with legislative gridlock. Republicans took the House and Democrats retained control of the Senate in this year’s midterm elections. «Midterm elections, no matter what, have a tendency to be very bullish, and the Santa Claus rally continues through the next three, six, 12 months,» he said.

what is santa claus rally

Meanwhile, technology — which is the largest sector in the S&P 500, is flat because some of the largest stocks (particularly Apple) have done well. Look past the largest names, and there is some selling, particularly in the more speculative tech stocks that Cathie Wood’s ARK Innovation ETF owns. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. Access and download collection of free Templates to help power your productivity and performance.

Santa Claus Rally watch: What to know this week

While the Santa Claus Rally was originally defined as lasting just seven days, some analysts and commentators tend to use the term more broadly to refer to longer time periods or even the entire month of December. Using the week leading up to Dec. 24 over two decades, we find there is no tangible or reliable Santa Claus rally. Whether you count that time period or the week after Dec. 25 up to Jan. 2 of the new year, the returns are negligible, if slightly positive at +0.385%. For reference, the chart below compares the results of trading in any random six-day period in the past 26 years with the results of trading two kinds of six-day groupings. The first is the turn-of-month effect, four sessions at the end of a month and two sessions into the next month.

  • If Santa’s a no-show, the S&P 500 historically underperforms in January and over the following year.
  • There’s also the argument that holiday shopping can bolster businesses’ bottom lines and help boost stock prices.
  • “By way of comparison, over the entire 30 year period, the S&P 500 Index itself has only generated an average annualised return of 7.52%,” it added.
  • Those numbers illustrate the risk of investing based on calendar theories like the Santa Claus Rally.

A Santa Claus rally is a market 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. 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. 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. Although data has shown that the Santa Claus rally period has generated more positive returns than negative returns, there is no way for traders/investors to predict whether it will happen again. It is important to note that past performance is not indicative of future results.

The Santa Claus Rally makes for interesting news stories when the phenomenon occurs, but counting on it to usher in the New Year is by no means guaranteed. The bear narrative, of course, is that omicron will lead to more persistent inflation issues. Bulls have been keeping a close eye on one of the final data points for the week — Thursday’s release of the November Personal Consumption Expenditure (PCE) deflator, the Fed’s preferred tool for examining inflation. Like other calendar effects, including the January effect and phrases such as, «Sell in May and go away,» there is strong evidence that the Santa Claus rally is real and can predict the market’s outcome.

History of the Santa Claus rally

“When it comes to the UK stock market, this success rate is even more pronounced, with December delivering positive returns 83% of the time,” he said. The best Santa Claus rally definition is that stock markets post positive results in the immediate run-up to Christmas and the very start of the new year. Investment advisory services offered through Facet Wealth, Inc.(“Facet”), an investment adviser registered with the Securities and Exchange Commission (SEC). Investing involves serious risks and past performance is no guarantee of future performance or success. This is not a solicitation or an offer to buy or sell securities and nothing contained herein should be interpreted as a recommendation or research regarding any investment or investment strategy, legal or tax advice. That doesn’t change the fact that the last four trading sessions of a year and first two sessions of the next year produce, on average, larger gains.

After another crash in early 2009, a 23% surge followed shortly thereafter. Over the course of the S&P 500’s history, certain months of the year deliver higher returns than others. November through January is statistically quite bullish, as November returns 1.42% on average, December returns 1.37% on average and January returns 0.98% on average. During that particular seven-day trading period, the S&P 500 was up an average 1.3% a year dating to 1950 and was positive in 79% of those years, according to an analysis by Michael Batnick, managing partner at Ritholtz Wealth Management.

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A larger-than-expected increase in interest rates or signs that inflation was hotter than anticipated could fuel stock-market jitters toward year-end. On Tuesday, Americans will get a look at whether inflation eased further in November, when the U.S. Bureau of Labor Statistics issues its latest monthly consumer price index report. The Federal Reserve is poised to continue its cycle of raising interest rates during a policy meeting next week. The central bank began raising borrowing costs aggressively in March this year to tame stubbornly high inflation. 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.

  • The other time-span definition—and our preferred one—is the week leading up to Dec. 24.
  • Of course, we are battling some significant global issues this year that could have a major bearing on whether anything approaching a Santa rally will actually take place.
  • First discovered by Yale Hirsch of «Stock Trader’s Almanac,» it has produced positive returns 34 of the past 45 years for an average return of 1.4%.
  • Ben Yearsley, investment director at UK-based Shore Financial Planning, is under no illusions as to what will be the prime influencing factor over the next few weeks.

It is an interesting news headline happening on the periphery but not a reason to become either more bullish or bearish. A better strategy is to maintain a long-term investment outlook and not be tempted by the promise of Santa Claus rallies or the January Effect. 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.

Given such a small historical return, and a marginally positive frequency of occurrences, traders should be extremely cautious about buying or selling based on the supposed Santa Claus rally. While Santa Claus can be counted on to deliver the presents on Christmas, the stock market cannot be relied upon to always deliver gifts. That said, any positive gain in the stock market around Christmas is virtually guaranteed to lead financial market observers to refer to the Santa Claus rally.

All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience.

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. As 2022’s final week of trading begins, traders and investors are likely excited about a potential Santa Claus Rally.

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Santa Claus rally: What do investors need to know?

Morgan Private Client Advisor who will help develop a personalized investment strategy to meet your evolving needs. Asset allocation/diversification does not guarantee a profit or protect against loss. Like most theories, the Santa Claus rally is believed to be true by some, and merely a coincidence to others. If we dig into the historical performance of the S&P 500, we will see that a case can be made for either side, depending on what timeframes are analyzed.

High year-end sales figures have a tendency to drive retailer stock prices up in anticipation of good quarterly returns. Both of these things are seen as having a domino effect on the rest of the market, leading to broad-based price increases. 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 best food stocks days of December and the first two trading days of January tend to produce higher average returns than other days. 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.

Over the last 20 years, the average winning day was just +1.85% against the average losing day of -3.28%, making the Santa Claus proposition even less attractive. Traders are commended to ignore the talk of a Santa Claus rally and instead stay focused on their own trading strategy and analysis. The historical statistics we looked at above suggest slightly better than odds that a stock rally will take place around Christmastime. However, there are also data points that suggest the rally is more of a shot. According to our analysis cited above, the average positive gain over the last two decades is +1.85%, while the average loss was -3.28%. To see if there is any validity to the proposition of a regularly occurring Santa Claus effect, we looked back at the last 20 years of performance of the Standard & Poor’s 500 (S&P 500) in the week leading up to Dec. 25.

what is santa claus rally

It’s a point echoed by Russ Mould, investment director at AJ Bell, who pointed out how markets were continuing their “up and down trajectory” since the new variant emerged. Ben Yearsley, investment director at UK-based Shore Financial Planning, is under no illusions as to what will be the prime influencing factor over the next few weeks. According to Seasonax, the  average gain produced by the year-end rally is equivalent to an annualised return of 50.45%. Seasonax found that the Santa rally begins on 15 December, with prices often pulling back prior to that date. Chase’s website and/or mobile terms, privacy and security policies don’t apply to the site or app you’re about to visit.

There are also theories that the Santa Clause rallies occur because institutional investors go on vacation over the holidays and aren’t actively trading during that time. This theory requires the assumption that retail investors tend to be more bullish and, when able to exert a larger impact on the market, will cause stock prices to rise. 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. A Santa Claus rally is a market theory describing when the stock market surges during the final week of December, extending into the following two trading days of the new year. There are a number of theories as to why this happens—from tax considerations to investors investing holiday bonuses to institutional investors taking a respite.

What «causes» a Santa Claus rally in stocks?

Burniske also says that a crypto bull cycle will require an increase in global market liquidity after it has contracted, which was likely the cause of the correction in the digital asset space. After no Santa Claus rally in 2018, the S&P 500 returned about 30% in 2019. Time is quickly running out for Santa Claus to arrive on Wall Street with a rally, but not everyone has given up hope yet, even though the market’s been uncertain and volatile up until the very end. The deciding factor will be just how disruptive it proves to be – both in our everyday lives and as far as companies are concerned. When it comes to Santa rally dates, however, it points out that the term is misunderstood.

Financial commentators say there is financial evidence of stock markets picking up at this time of year, although past performance has no bearing on what may happen in the future. According to The Stock Trader’s Almanac, the S&P 500 has gained an average of 1.3% since 1950 during the Santa Claus Rally periods. More recently, since the inception of the SPDR S&P 500 ETF Trust (SPY) in 1993, the Santa Claus Rally has produced gains 18 out of 27 times, or about 67% of the time.

How Frequently Do Santa Claus Rallies occur?

According to LPL Financial, a US-based advisory firm, the term was first adopted in 1972 by Yale Hirsch, creator of the Stock Trader’s Almanac. «Chase Private Client» is the brand name for a banking and investment product and service offering, requiring a Chase Private Client Checking℠ account. Get relevant tips and viewpoints to help you make smart investment decisions, powered by the expertise of J.P. JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice.

However, there is no clear cause for the Santa Claus rally, and there’s no guarantee that it will continue. By definition, the Santa Claus rally refers to gains in the market that typically happen in the last five days in one year and the first two days of the next. The term is sometimes used to refer to any rally that takes place around the end of the year. Still, investors should be aware of how the market moves at different times of the year. 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.

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