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What Is a Santa Claus Rally? When Does It Start?
Do you believe in the Santa Claus rally?
It doesn’t matter if the markets were naughty or nice during the year—the last few trading days typically see gains in the stock market, as measured by the S&P 500.
Known as a Santa Claus rally, this end-of-year phenomenon usually takes place between the last five trading days of December and the first two trading days of January. This is typically a period when the market sentiment is positive, there is less volatility, and an overall sense of optimism seems to pervade the marke.
While a Santa Claus rally is not always guaranteed, it is very likely; since 1999, Santa Claus has come to town 19 out of 24 times.
S&P 500 Santa Claus Rally by Year
What’s even more astounding is that a Santa Claus rally is seen as an accurate predictor of the next year’s stock market direction, be it up or down. Check out the table above and you can also see that since 1999, the market has risen 18 times during the Santa Claus rally; the following year, the S&P posted gains 14 times. Out of the 5 times the market lost ground during same period, the market fell in 3 of the following years.
History of the Santa Claus Rally
The Santa Claus rally was first noticed by Yale Hirsch in 1972 in his Stock Trader’s Almanac, which detailed stock market history, patterns, and cycles. Since 1950, he concluded, the S&P 500 had averaged year-end gains of 1.5%. But even more important than the year-end gains was the promise of what lay ahead—because more than 75% of the time, Hirsch discovered, the Santa Claus rally had accurately predicted the next year’s market movement.
In fact, Hirsch even created a rhyme about it, saying that “If Santa Claus should fail to call, bears may come to Broad and Wall,” refering to the intersection of Broadway and Wall St. in New York, the location of the New York Stock Exchange.
What Are the Causes of the Santa Claus Rally?
Folktales aside, there are several real-world explanations behind the Santa Claus rally:
- Tax-Loss Harvesting: Especially during “down” years, investors take a tax loss on their investments by selling their stocks at the end of the year and claiming capital losses. They then repurchase these stocks in the early part of the following year with the hope to see gains. Since the Santa Claus rally period covers both the end of one calendar year and the beginning of the next one, this practice might be “priced in” to the markets.
- Low trading volume: Larger institutional investors typically go on holiday between Christmas and New Year’s, leaving the markets pretty empty. Low volume adds more firepower to those who are left in the markets, like individual investors, who could be buying stocks with year-end bonuses and feeling pretty optimistic overall.
- Herd mentality: And, just like the spirit of Santa Claus, if you believe in the Santa Claus rally, your actions follow accordingly, creating a herd mentality, a prophecy, or a similar self-fulfilling outcome.
What Stocks Should You Buy During the Santa Claus Rally?
Past performance is never a guarantee of future gains. However, December has historically been one of the strongest months of the year for the stock market, and analysts do consider the Santa Claus rally to be a reliable predictor of stock market trends. But mounting headwinds from external forces, such as inflation or interest rate hikes from the Federal Reserve could dampen the potential for any year’s final rallies, so the smartest investors do best to pay attention to all the indicators out there—whether they’re in the Christmas spirit or not.
