The ‘Santa Claus rally’ defined and the chances it occurs this year on Wall Street

Last week, the Bureau of Economic Analysis reported core personal consumption expenditures (PCE) — the Fed’s preferred inflation gauge — rose at a 4.7% year-over-year clip, or the fastest since 1983. As traders return from the holiday-shortened week, the price action heading into the new year will be closely monitored — especially given the relatively light economic data and earnings calendar for the coming days. 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. 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. 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.

According to The Wall Street Journal, historically, the S&P 500, the Dow Jones Industrial Average (DJIA), and the Nasdaq Composite have risen about 80% of the time during the Santa Claus rally period. The average returns for the S&P 500, the Dow, and the Nasdaq Composite over the period have been 1.3%, 1.4%, and 1.8%, respectively. Several theories try to explain the Santa Claus rally, including investor optimism fueled by the holiday spirit, increased holiday shopping, and the investing of holiday bonuses. Another theory is that this is the time of year when institutional investors go on vacation—leaving the market to retail investors, who tend to be more bullish. Given such a small historical return, and a marginally positive frequency of occurrences, traders should be extremely cautious about buying or selling based on the supposed Santa Claus rally.

According to Lee, since 1950 there have been eight months when stocks were up more than 10% in through August but down in the first three days of September. In five of those eight months, stocks finished higher for the rest of September. In addition to managing markets coverage, he writes about stocks, bonds, currencies and commodities, including oil. During his time at MarketWatch, Watts has served in key roles in the Frankfurt, London, New York and Washington, D.C., newsrooms. And this year, investors do have considerable additional concerns to mull heading into the new year. Plus, prospects for more near-term fiscal support via the Biden administration’s Build Back Better bill have dwindled, and inflation concerns spiked further.

Santa Claus rally FAQs

If history is a guide, stock investors may be poised to get a gift over the holidays. Traders should be wary of market talk surrounding the notion of a Santa Claus rally, and stay fixed on the current market environment. While we can expect Santa Claus to deliver presents on time, we can’t expect him to always deliver reliable stock-market gains. “Equities can hold in here,” the Wharton professor said on the “Behind the Markets” podcast earlier this month. That’s because inflation is falling, meaning the Fed is less likely to hike interest rates. But despite September being an unfortunate month for stocks, it’s also a good opportunity to invest in cheap equities before a typical “year-end Santa Claus rally”, according to him.

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. Observing the Santa Claus rally is one thing, but actually trying to profitably trade the so-called phenomenon is another matter. 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.

What is a Santa Claus rally? Will it happen in 2022?

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. 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.

Over the last 20 years of following the Santa Claus rally proposition, the average return was only +0.385%, which we do not consider a viable trade opportunity for any but the most nimble of traders. However, a Santa Claus rally isn’t always an accurate predictor of gains the next year. In 2021, the S&P 500 gained 1.4% in the seven-day period, but the market peaked on Jan. 3 and entered a bear market in June, falling more than 20% as the Federal Reserve Board aggressively raised interest rates. It is the tendency for the market to rise in the last five trading days of the current year and the first two days of the new year. First discovered by Yale Hirsch of “Stock Trader’s Almanac,” it has produced positive returns 34 of the past 45 years for an average return of 1.4%.

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. “If this recession hasn’t happened by the first quarter of next year,” he recently said on the WTFinance podcast, “I will wipe the egg off my face, and I’ll write a report saying, ‘I was wrong, the business cycle has been repealed after all.” Market experts remain split on whether US equities will repeat the pattern.

Republicans took the House and Democrats retained control of the Senate in this year’s midterm elections. “That is a very small move, less than 1%,” Alec Young, chief investment officer at Tactical Alpha, told me. “That is a day’s trading. Even if we chop around for a few days, we can still do it.” The ultimate hope is that the markets remain choppy in the next few days but rallies going into the close of the year.

What Is the Rationale Behind the 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. 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. “When you think of a definition of offer, it’s all about anticipating or looking forward,” said Terry DuFrene, global investment specialist at J.P. “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.

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. Historically, this seven-day period has brought good news for investors, giving them another reason to cheer during the holiday season. Similarly in 2008, during the stock market crash caused by the financial crisis, stocks actually got a Santa Claus rally in the midst of a larger bear market rally. During the seven-day period, the S&P 500 gained 7.5%, although it would crash again in the first two months of 2009 before bottoming out on March 9. 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.

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. “The Santa rally is real,” and it could give your portfolio a boost between the end of this year and the start of 2022, according to an analysis from Bank of America. Coined by Yale Hirsch, founder of the Stock Trader’s Almanac, the Santa Claus Rally describes what happens over the last five trading days of the year and the first two of the next. Cramer said he thought Fed chief Jerome Powell “threaded the needle” during his Wednesday press conference and helped spark the afternoon stock rally.

• 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.
• Other factors include holiday and year-end bonuses and the expectation that a rally will take place in late December — because that’s usually the case.
• 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.
• The S&P 500 was positive during those seven days in 15 of the 20 years — or 75% of the time, FactSet found.

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. The Santa Claus rally is used to describe the tendency for the stock market to rise in the last five trading days of the current calendar year and the first two trading days of the new year. More recently, since 1994, stocks have been positive 23 times during this period.

Earnings calendar

Looking further ahead, the real rally could come not from Santa Claus but from Federal Reserve Chairman Jerome Powell, who will decide how much longer to hike interest rates to tame inflation. Major stock indexes closed lower on Wednesday, with the Nasdaq-100 even ending at its lowest level this year, making things look bleak for the so-called “Santa Claus rally,” which has occurred 79% of the time since 1950, according to LPL Financial. A rebound across the major indexes on Thursday brought back what has turned out to be false hope for the late, short-lived rally, which some use as an indicator of what’s to come in the new year.

“If earnings don’t pan out, we could quickly test the 3550 level” in the S&P 500 index. If Santa delivers a rally, the S&P 500 on average gains 1.3% in January and 10.9% for the new year 75.4% of the time, LPL said. Detrick also observed that a positive move during this period often came with strong returns over the month of January. 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. “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.

Bureau of Labor Statistics issues its latest monthly consumer price index report. Whatever the reason for the Santa Claus rally, investors can use a bit of good news. “That is meaningful,” Batnick said of the difference in returns and positivity rate. This has caused some to shift the mix of stocks they own, but the overall effect is still very modest.

Santa Claus Rally watch: What to know this week

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 https://1investing.in/. 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.

A prominent crypto venture capitalist believes that the digital assets market will likely rally around Christmas time after a tough start to September. Testimonials were provided by current clients of Facet Wealth, Inc. (“Facet”). Clients have not been paid for their testimonial and there are no material conflicts of interest that would affect the given testimonials. These testimonials may not be representative of the experiences of other clients, and do not provide a guarantee of future performance success or similar services.

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. 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. There’s also the argument that holiday shopping can bolster businesses’ bottom lines and help boost stock prices. Also, many employees receive year-end bonuses that can be invested in the market.

Of note, many stock pickers in actively managed mutual funds tend to invest in value stocks. To see if there is any validity to the proposition of a regularly occurring Santa Claus effect, we looked back at the last 20 years of performance of the Standard & Poor’s 500 (S&P 500) in the week leading up to Dec. 25. Based on our review of the data, we can state that there is minimal evidence of any discernible Santa Claus rally.

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%. 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.