Historically, this seven-day period has brought good news for investors, giving them another reason to cheer during the holiday season. Some believe that the rally is caused by the temporary bullish optimism of investors relaxing with family or from retail investors investing their holiday bonuses. There are also more general calendar trends called the ‘holiday effect’ or the ‘long-weekend effect’ where the stock market is theorized to perform better than average before https://www.tradebot.online/ holiday periods. This could be because lighter trading volumes during these periods make it easier for bullish investors to move the market. 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.
Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. 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. Whatever the reason for the Santa Claus rally, investors can use a bit of good news.
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. 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. Some researchers believe one reason for the Santa Claus rally is bullish investors’ sentiment as people are generally optimistic around the holiday season.
However, short-term traders may take more action in the hopes of positioning themselves for a rally. They may buy stocks or stock funds ahead of the end of the year and look to sell them once a rally has taken place. 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.”
What Is the Time Period for the Santa Claus Rally?
December tends to be among the strongest months of the year for U.S. stock performance. Since 1926, only returns in July and April have outpaced December’s average — about 1.9% and 1.7% versus 1.6%, respectively, according to data from Morningstar Direct. Professional investors often adjust their portfolios at the end of the year for tax purposes by selling stocks at a loss. That temporarily pushes down stock prices, but that trend is soon reversed as investors begin buying stocks again, pushing prices higher.
- The unlikeliness of the government or regulators announcing any bad news during the holidays may be the driving force behind this optimism.
- Still, investors should be aware of how the market moves at different times of the year.
- If there’s a Santa Claus rally to end a year, the next year is expected to be good.
- “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.
- Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional.
In some years, the stock market has also declined sharply during the days in question. For example, from 2014 to 2015 the S&P 500 experienced a decline of 3.01% and from 2015 to 2016, that index declined by 2.27%. 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. 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. 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.
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. A Santa Claus Rally is a seasonal stock market trend that often occurs near the end of the fiscal year. The stock market often yields positive returns during the last five business days of December and the first two business days of the new year, although this is by no means guaranteed. It was first observed by Yale Hirsch in the 1972 version of The Stock Trader’s Almanac. Generally, the Santa Claus rally refers to the stock market’s history of rising over the last five trading days of the year and the first two market days of the new year.
The pattern has held true since 1950, with the broad market index increasing an average of 1.3%. Additionally, the market has gained during those days in 34 of the previous 45 years, or more than 75% of the time. By comparison, S&P 500 returns were a much smaller 0.24% during all other seven-day trading periods dating to 1950, Batnick said. 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. 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.
Trading the Santa Claus Rally
Santa Claus rallies may or may not last through the remainder of January and on through the year. For example, despite a strong Santa Claus rally at the end of 2008 and early 2009, the S&P 500 lost nearly 11% between the end of the rally and the end of January.
“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. Again, looking at the historical performance of the S&P 500 over the last two decades, we conclude that it is nearly a toss-up between a tangible rally and a normal trading week. 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 Santa Claus Rally Defined
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. Many individuals will see the most benefit from long-term investing in diversified mutual funds. The January Barometer is a theory that claims that the returns experienced in the January stock market predict the performance of the market for the upcoming year.
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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A Santa Claus rally in the stock market refers to the tendency for the S&P 500 to increase in the final five trading days of December and the first two days of January in the new year. A Santa Claus rally has occurred 59 times since 1950, according to the Stock Trader’s Almanac. Some market commentators may casually refer to a Santa Claus rally at any point in December. A Santa Claus rally is a jump in stock prices, observed in the final five trading days of the year, typically starting a day after Christmas and going into the first few trading days of the New Year.
The S&P 500 was positive during those seven days in 15 of the 20 years — or 75% of the time, FactSet found. 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. Bankrate.com is an independent, advertising-supported publisher and comparison service.
Historical Data
According to data compiled by Stock Trader’s Almanac in the 70 years between 1950 and 2020, a Santa Claus rally has occurred 57 times and has, on average, seen the S&P 500 go up by 1.3%. Between 1926 and 1950, it existed as the Composite Stock Index, tracking 90 stocks. 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%. A Santa Claus rally is the sustained increase in the stock market that occurs around the Christmas holiday on Dec. 25.