What Is the Santa Claus Rally? The Motley Fool

Most long-term oriented investors don’t really need to spend much time obsessing over what may happen in the stock market over extremely short periods of time. Many consider the Santa Claus rally results from people buying stocks in anticipation of the rise in stock prices during January, otherwise known as the January effect. The most straightforward trading strategy would be to go long on companies that exhibit these seasonal trends.

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. If investors anticipate it, they are likely to behave differently, and market participants may adjust according to the expectation of a Santa Claus rally. In 2018, the S&P 500 finished the month with a 6.6% gain after December 24, which were the last four trading days of the month. Although the index fell on Jan. 3 — the second day of the new year — December 24 proved to be the market bottom. Buffett will be happy to hear his big energy play, Occidental Petroleum, is a big winner during Santa Claus rallies. The stock gained 7.5%, on average, during the past five Santa Claus Rally periods.

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From the opposite perspective, a Santa Claus rally isn’t a reliable forecaster of future returns. For example, even though the S&P 500 yielded 1.4% during the seven-day period in 2021, it topped out on the 3rd of January. Hirsch’s theory came from his research of the Standard and Poor’s 500 (S&P 500) performance between 1950 and 1971 over the seven-day period stated above. Moreover, the market has been positive in 34 of the last 45 years, just over 75%. 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. In addition, when it comes to the average returns generated in December, Bestinvest’s analysis has revealed what could be an encouraging end of year pattern.

  • History would show that, yes, holidays definitely have an effect on the stock market.
  • Others insist that the Santa Claus Rally is related to increased holiday spending.
  • In this case, it’s possible that the effect has something to do with tax-loss harvesting.
  • Whatever the case, it’s wise not to count on seasonal phenomena as a tried and true investing method.

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%. Given such a small historical return, and a marginally positive frequency atfx forex broker review 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.

The Santa Claus rally refers to gains in the stock market that often take place at the end of December. 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. tornado web server 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.

The Midland, Tex.-based energy exploration firm has never once fallen during the Santa Claus Rally period. And it’s gained an average of 7.3% during the time, second only to Occidental. Outsourced Chief Investment Officer service to institutional investors.

What Is A Santa Claus Rally?

For the purposes of defining when the Santa Claus rally happens—to the extent it does—our research leads us to focus on the week before Christmas to document the potential Santa Claus rally effect. “Since 1980, the S&P’s December high happened during the last week of this month in almost half (41 pct) of years,” she said in a recent note to clients. “Economists expect inflation to peak here in Q4 and for the next several quarters,” Marc Chandler, managing director at Bannockburn Global Forex, told me. This combination — a strong consumer and economy, coupled with a Fed that is raising rates slowly and gradually — means the market should hold up in 2022.

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. Others insist that the Santa Claus Rally is related to increased holiday spending. In fact, some analysts suggest that strong retail spending is seen as an important economic indicator of economic growth and promotes bullish buying behavior as a result. 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.

The media tends to jump at the chance to turn any seasonal market uptick into a compelling story, and the Santa Claus rally is no exception. But, while December is generally one of the best months for US stocks, the reasons aren’t exactly clear. Those numbers illustrate the risk of investing based on calendar theories like the Santa Claus Rally. There is no way to predict if one will occur and sometimes the impact is relatively minor or can even be negative. Also, because it is unclear exactly why the Santa Claus Rally occurs, it is impossible to predict whether those influences will recur in any given year.

Example of A Santa Claus Rally

It’s also an effect that appears to have persisted, despite widespread research on the topic. But real-time rental market data shows that rent growth is actually on the decline, Yardeni pointed. Asking rent prices climbed by just 0.2% month-per-month and 3.2% year-per-month, according to more recent Zillow data. One of the easiest and most efficient ways to find the best trading opportunities during the Christmas stock market rally is to use professional stock screener software. There are a few signs you can look out for to see when the holidays are beginning to affect the stock market. Investment advisory services offered through Facet Wealth, Inc.(“Facet”), an investment adviser registered with the Securities and Exchange Commission (SEC).

By using strategies such as stop orders, stop-loss orders, and other trading methods to minimize risk when making short-term trades, investors can realize great profits. Perhaps it’s optimism over the coming year, increased holiday spending, or maybe it’s a derivative of “tax-loss-selling season,” when institutional and retail investors sell failing holdings to reduce their capital gains. 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.

How Frequently Do Santa Claus Rallies occur?

Additionally, the first quarter of year three of the presidential cycle also has been the strongest of the four quarters that year, it said. If Santa’s a no-show, the S&P 500 historically underperforms in January and over the following year. The S&P 500 on average drops 0.3% and returns only 4.1% for the new year 66.7% of the time, LPL said. Regardless of the mechanics behind the rally, it’s an observable effect and it occurs roughly two out of three years, so investors should be prepared to see whether Santa shows up at the end of each year. 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.

However, some analysts use this term to refer to the period starting as early as Black Friday and ending at the beginning of January. For the past several decades, studies have shown that this time of year can have a much more significant impact on the national stock market than you might think. The holidays have arrived, which can be good or bad for your bank account depending on what you know about the phenomenon known as the Santa Claus rally.

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. Like the jolly bearded man it is named after, no one knows the definitive reason why a Santa Claus Rally arrives in December and often gifts investors with positive returns through the holidays.

Whatever the case, it’s wise not to count on seasonal phenomena as a tried and true investing method. As history has proven, anything can happen, and the best investment strategy is one that considers your whole financial situation for the long term. For the believers, one can point to the Santa Claus rally that occurred in the middle of the worst bear market since the Great Depression—the 2008 Great Recession. 12trader forex broker review After another crash in early 2009, a 23% surge followed shortly thereafter. “The real Santa Claus Rally is the final five trading days of the year and first two trading days of the following year, not just December,” it stated. 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.

The first is the turn-of-month effect, four sessions at the end of a month and two sessions into the next month. The second is specifically the returns from trading the Santa Claus rally belief. There are two schools of thought about the timing of the Santa Claus rally effect on the Standard & Poor’s (S&P) 500 Index. The first suggests the Santa Claus rally occurs in the week leading up to and ending with Dec. 24, Christmas Eve. The other 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.

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