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. 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. 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. The pattern has held true since 1950, with the broad market index increasing an average of 1.3%.
Is the Santa Claus Rally Even Real?
Whether one believes in the Santa Rally or not, it is undeniable that the holiday season has a unique influence on the stock market. Being aware of this phenomenon and adopting a prudent approach can help investors make more informed decisions and navigate the market with greater confidence. Some studies suggest that there is evidence of a Santa Rally effect, with stock prices exhibiting positive returns during the month of December. However, the magnitude of the effect and its consistency across different markets and time periods remain subjects of debate. First, institutional investors aren’t necessarily doing a lot of short selling in the first place. Second, if the Santa Claus period is such a great time to be active in the stock market, it seems unlikely that institutional investors would blow it off.
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If investors anticipate it, they are likely to behave differently, and market participants may adjust according to the expectation of a Santa Claus rally. 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. The second major question is whether the Santa Claus rally really even exists.
The unlikeliness of the government or regulators announcing any bad news during the holidays may be the driving force behind this optimism. 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. Since 1950, the S&P 500 has gained an average of 1.3% during the seven-day period in which the rally takes place, and it’s gained in 34 of the past 45 years. However, there is no clear cause for the Santa Claus rally, and there’s no guarantee that it will continue. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer.
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.” CFRA found that in the years when a Santa Claus rally occurred, the average full-year gain for the index in the year that followed was 9.8%.
- According to Yale Hirsch, who first noticed the trend of stocks gaining at the end of the year, the Santa Claus rally refers to stocks moving higher on the last five trading days of one year and the first two trading sessions of the next year.
- If you’d like to draw your own conclusions, here are some additional points to consider.
- One of the main critiques of the Santa Rally is that it lacks a solid foundation in economic theory and empirical evidence.
- Amy also has extensive experience editing academic papers and articles by professional economists, including eight years as the production manager of an economics journal.
The week before Christmas typically has normal to significant volume, compared with the week after Christmas, which is usually marked by generally sideways stock-price movement with small ranges. 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. Investors should conduct thorough research and consider various factors before making investment decisions. While the Santa Claus Rally is a well-known phenomenon, it’s essential to note that past performance is not always indicative of future results.
Historical Data
The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. 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%. Over the years, many analysts have tried to speculate about the reasons for the Santa Claus rally. The perceived causes for the rally include an overall, holiday-season spirit, in which retail traders hold an outsize bullish outlook and institutional players tend to step back from the market.
The other forex trading strategies for the winning trader scenario suggests the Santa Claus rally occurs in the week following Christmas, up to and including the first two trading days of the New Year. 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. Dubbed a Santa Claus rally, this phenomenon describes a tendency for the stock market to go up by 1% to 2% over the period spanning the last five trading days of the outgoing year and the first two trading days of the incoming one. According to Yale Hirsch, the first two trading days in January are included in the rally.
January
Observing the Santa Claus rally is common, but trying to trade the phenomenon is another matter. 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. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns. However, market commentators will sometimes use the phrase to describe any rally that takes place around the end of December. Just because the Santa Claus rally does usually happen, and it often predicts the market the following year, that doesn’t mean it will continue to do so.
However, other interpretations of the time period covered by the term exist, such as yielding positive returns for the month of December. 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. Long-term investors, such as those saving for retirement, can generally ignore whether or not the stock market has a Santa Claus rally. Market performance over seven trading days is barely a blip over the course of an investing life, so trying to react to a potential rally is typically a mistake. Additionally, skeptics argue that any observed rally during the holiday season can be attributed to random market fluctuations rather than a specific Santa Rally effect.
Some view it as a seasonal pattern worth considering, while others may see it as a coincidence without significant predictive power. From 1987 through 2016, no evidence of a Santa Claus rally exists in the S&P 500, according to a statistical analysis by Brigid Cami, then a master’s student at the University of Toronto. For example, bonuses may be calculated after the company’s fiscal year ends and its annual performance can be calculated. And even if a company awards bonuses in December, they might not show up in workers’ paychecks until mid-January.
The pattern is one of a number of “calendar effects” that occur, or at least are believed to occur, over the course of the year. 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. A Santa Rally in the stock market can have a significant impact on stock prices and investor behavior with many stocks experiencing upward momentum. Additionally, the Santa Rally can influence investor behavior, leading to consulting is more than giving advice increased buying activity and a sense of bullishness in the market. 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.
But there’s no consensus on how their absence or reduced activity might contribute to a Santa Claus rally. In early December, investors looking to reduce their taxable gains and rebalance their portfolios often sell stocks that have lost value, a practice called tax-loss harvesting. This large-scale selling, it’s theorized, depresses many stocks’ prices and sets the stage for year-end gains. When investors consider data that spans 20 years of performance of the Standard & Poor’s 500 (S&P 500) in the week leading up to Dec. 25 from 2002 to 2022, there is minimal evidence of any diy financial advisor 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.