What a Santa Claus rally means for investors

However, market commentators will sometimes use the phrase to describe any rally that takes place around the end of December. For example, in 2018, the S&P 500 fell through much of the fourth quarter as Treasury yields rose. Halloween strategy is a trading tactic, which posits that stocks perform better from Oct. 31 to May 1 than they do during the rest of the year. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.

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  • For instance, Santa didn’t come in 1999 when the S&P 500 fell 4%.
  • We also reference original research from other reputable publishers where appropriate.
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  • 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.

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. “That is meaningful,” Batnick said of the difference in returns and positivity rate.

Cramer said that the market’s recent downturn is the perfect setup for a Santa Claus rally, which describes U.S. stocks’ tendency to rise near the end of the year and the beginning of the new year. For Williams, it’s a matter of when, not if, stocks will run up, according to Cramer. However, it’s a mistake to confuse correlation for causality here. 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. 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.

The Fed’s aggressive monetary policy has driven this year’s equity sell-off, but Rabe said any returns in 2023 will come down to the central bank. Investors won’t see big returns on stocks 2023 if a build basic android apps with java doesn’t happen before the new year. He has more than 25 years of experience managing portfolios for individual investors. He graduated from the University of North Carolina at Chapel Hill with a B.A. The rally has meaning beyond the gain, provided it happens, because its occurrence tends to bode well for the month of January and the rest of the year. It looks like day two of this stretch is starting off on the right foot.

Theories for the Santa Claus rally’s existence include increased holiday shopping, optimism fueled by the seasonal spirit, and institutional investors settling their books before going on vacation. But the January effect when institutional investors ready themselves for the new year to set up positions for the coming weeks can be a positive phenomenon. Buffett will be happy to hear his big energy play, Occidental Petroleum, is a big winner during Santa Claus rallies.

What is the Santa Claus rally in the stock market?

In this examination of the Santa Claus rally, we’ll discuss the origins of the rally, why it happens, and the history behind it. As with many market anomalies, the Santa Claus rally may just be random; there is no guarantee it will appear in the future.

The chart suggests that the market just entered the “seasonal sweet spot,” Cramer said. He added that Thursday’s trading session would be the ideal moment to buy ahead of a potential rally, according to Williams. Stocks fell for a fourth consecutive trading session on Monday, weighed down by mounting recession fears. A larger-than-expected increase in interest rates or signs that inflation was hotter than anticipated could fuel stock-market jitters toward year-end.

The phenomenon, given its label by analyst and creator of the Stock Trader’s Almanac Yale Hirsch, generally takes place during the last week of December into the first few days of January. Some years, the rally has taken place over an extended period, beginning Dec. 14 and lasting over two weeks. U.S. consumer spending barely rose in November, while annual inflation increased at its slowest pace in 13 months, but demand is probably not cooling fast enough to discourage the Fed from driving interest rates higher next year. NEW YORK, Dec Bruised investors are hoping a so-called Santa Claus rally can soften the pain of a tough year in U.S. stocks and potentially brighten the outlook for 2023. Outsourced Chief Investment Officer service to institutional investors. He has previously served as Chief Investment Officer at Moola and FutureAdvisor, both are consumer investment startups that were subsequently acquired by S&P 500 firms.

santa rally

“Santa Claus tends to come to Wall Street nearly every year, bringing a short, sweet, respectable rally within,” the Almanac said. 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. During the Santa Rallies that have taken place during the last 3 recessions, the S&P 500 has spiked an average of 3.8%. Historically during a Santa Claus Rally, the S&P 500 has risen an average of 1.3%.

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 days of December and the first two trading days of January tend to produce higher average returns than other days. Our analysis cited above suggests there is only a marginally positive opportunity in trading the so-called Santa Claus rally. The data that we examined shows a roughly 60-65% chance of a positive week in the run up to Dec. 25. However, the risk-reward balance is decidedly skewed to the negative side.

Understanding the Santa Claus rally

Out of those 4 times that a Santa Rally has occurred, the S&P 500 increased an average of 3.8%, beating the overall average of Santa Rally spikes by 2.5%. Screen for heightened risk individual and entities globally to help uncover hidden risks in business relationships and human networks. Other inflation measures have also shown signs of slowing, with consumer prices rising less than expected for a second straight month in November.

santa rally

To the extent it exists, many consider the Santa Claus rally to be a result of people buying stocks in anticipation of the rise in stock prices during the month of January, otherwise known as theJanuary Effect. These types of investors may also rebalance portfolios for tax-loss selling in December to close out losses, followed by repurchasing in January. Research shows that this single 7-day period has produced a positive return for the S&P % of the time. Start Trading Stocks in 3 Days Learn how to trade stocks like a pro with just 3 email lessons! Sign up for free today.MarketDiem Flash Sale Seize the market with top trade ideas delivered daily—get 1 year of MarketDiem for $20.Follow IBD on TikTok! Boost your investing and personal finance knowledge with bite-size educational videos.

Stock Market Today, Jan. 4, 2023: Stocks Finish in the Green

Few economic reports are due next week, with readings on the U.S. housing market and jobless claims, while stock market liquidity is expected to fall near its lowest levels of the year with many on Wall Street off for the holidays. The S&P 500 has posted only 18 Decembers with losses since 1950, Truist Advisory Services data showed. The index has gained an average of 1.6% in December, the highest of any month and more than double the average 0.7% gain of all months, according to CFRA data. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.

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. There are numerous explanations for the causes of a Santa Claus rally, including tax considerations, a general feeling of optimism and seasonal happiness on Wall Street, and the investing of holiday bonuses. All seven of these stocks beat the S&P 500 during the Santa Claus Rally period the past five straight years. And they also posted average gains during the period of 5% or higher.

santa rally

The Nasdaq Composite COMP, +1.76%has traded higher 78% of the time since 1971, for a 1.81% average gain, while the Russell 2000 RUT, +0.67%has been up 71% of the time since 1987 and gained 1.5% on average. 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. Some researchers believe one reason for the Santa Claus rally is bullish investors’ sentiment as people are generally optimistic around the holiday season. The unlikeliness of the government or regulators announcing any bad news during the holidays may be the driving force behind this optimism. Some analysts believe that it’s caused by the completion of tax-loss harvesting. Professional investors often adjust their portfolios at the end of the year for tax purposes by selling stocks at a loss.

What Is a Santa Claus Rally?

Over the course of the last three recessions, there have been five holiday periods and a Santa Rally has taken place during four out of five of those periods (80% of the time), beating the 66.66% overall average. The expectation that a rally will take place, which causes a high number of traders and investors to buy stocks, resulting in a self-fulfilling prophecy. 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. Investors may already be reinvesting tax loss harvesting money at the end of December.

What Causes a Santa Claus Rally?

The blue line at the bottom is Williams’ seasonal forecast, and suggests the best buying opportunities come in mid-to-late December, with the Santa Claus rally tending to last through January 10. The chart shows that stocks rallied from December 20 through the end of the year, in line with the forecast. CNBC’s Jim Cramer on Monday said there could be an opportunity to buy stocks ahead of a possible rally. Of course, past performance doesn’t mean it’s a given stocks will rally. 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 market generally responds positively to divided government due to the relative predictability that comes with legislative gridlock.

Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns. After Hirsch wrote about the pattern, it seemed to become part of the investing lexicon by the early 2000s when a number of references were made to the term in the financial media. https://traderevolution.net/ 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. Trading volume tends to be low since institutional investors take off the week after Christmas.

It’s the time of the year when the traditional seasonal lift for U.S. stocks known as the “Santa Claus rally” usually takes place. But unlike past holiday seasons, this one may get bogged down by the risks of a recession and continued rise in interest rates during the new year. A challenge with these sort of calendar effects is that you can statistically test for them, but it’s harder to understand why they work.

When this has occurred in the past, the Fed’s next move has been to lower rates. At the moment, the inversion has been just 5-10 basis points at most. If it becomes larger, it should become a more reliable indicator. The key will be to see the 2-year yield decline between now and the end of January. I expect the market to tell the Fed between now and then that its terminal rate expectations are too high. Friday started the seven-day stretch that will hopefully produce a Santa Claus rally, which would bode well for January and 2023.

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. 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. Investors shed stocks at the highest weekly rate ever in the week to Wednesday, selling a net $41.9 billion, according to a BofA Global Research report on Friday. It attributed the sell-off to “tax loss harvesting,” a strategy that involves selling assets at a loss to offset capital gains taxes.

Santa Claus rally FAQs

Investors already have plenty of reason to fear what could come next. Concerns about an imminent recession, declining corporate earnings, and more Fed rate hikes are mounting — add in a downbeat stock outlook and the holiday cheer gets even more muted. The S&P 500 has gained an average of 4.1% in the year after a December without a 3 moving average crossover strategy, compared to a 10.9% gain following a period when one takes place. January gains are also muted in a non-Santa year, with the index falling an average of 0.3% compared to a 1.3% gain after a Santa year, the data showed. When stock-market gains failed to materialize during the Santa stretch, the S&P 500 eked out just a 0.53% average gain in the first quarter that followed, according to Dow Jones Market Data. That’s in contrast to the majority of times when there were holiday-season gains, with the index producing an average 2.49% first-quarter advance thereafter.

The reality is that statistics put the proposition of a Santa Claus rally on the order of a split. Not necessarily a firm basis to be long the market heading into Christmas. The risk/reward proposition (how much you’re likely to win on a winning day versus how much you could lose on a losing day) is also decidedly negative. 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.

You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. 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.

Some investors use the existence of Santa Claus rallies as indicators for the coming year. If there’s a Santa Claus rally to end a year, the next year is expected to be good. Santa Claus rallies are attributed to optimistic investor sentiment and conclusion of tax-loss harvesting, among other factors.