Santa Claus Rally: What It Is and Why It Matters
The Santa Claus Rally is a common stock market phenomenon.
As the holidays draw closer, most people are focused on buying gifts and catching sales found on Black Friday and Cyber Monday. While this may be the most common focus during the holiday season, there’s an entirely different trend that investors follow: the Santa Claus rally.
The rally refers to stock prices increasing in the week immediately following Christmas through the beginning of the New Year. Let’s take a closer look at this phenomenon.
The Santa Claus rally usually happens just after Christmas and extends into the first few trading days of the new year.
Stock prices may rise slightly during the rally period as a result of investors taking advantage of lower trading volumes and lower initial prices.
The rally is expected to occur most years.
History and Origins of the Santa Claus Rally
The term, “Santa Claus rally” was first used by Yale Hirsch in 1972 to describe the phenomenon that happens to the stock market just after Christmas. As the name implies, the market tends to rally as we approach the holidays, meaning it improves and prices steadily increase at the end of the year. The phenomenon has happened consistently since 1950.
In most years, the phenomenon lasts for just seven days, starting the day after Christmas and running until the second trading day of the new year. But if the holiday falls on a weekend, the rally may begin before or after Christmas.
The exact gain investors see depends on the individual stock, but the S&P 500 typically increases by 1.3% during this time.¹
Factors That Contribute to the Santa Rally
Ultimately, the exact reason for the Santa Claus rally is a matter of speculation. But economists and stock market experts believe the following reasons may contribute to the phenomenon.²
Low trading volumes after Christmas: Immediately following Christmas, most institutional investors take the week off. This results in low trading volumes for both stocks and bonds, which may help other investors make purchases at lower prices. Less trading volume means less demand, which often causes prices to drop.
Tax loss harvesting: Some investors may try to sell some of their stocks at a loss to offset the gains made by other higher-performing investments. This helps reduce the amount of taxes they may owe for the year when they file. Selling at a loss may make stocks more affordable for buyers.
A general sense of optimism: The holidays often foster feelings of good will and hopefulness for the future. This may make people more inclined to invest and take chances on the market, resulting in an increase in prices and market performance. When there’s increased demand, prices tend to be higher.
Getting ahead of the January effect: During the first month of the new year, that optimism tends to carry through the market, increasing demand for new trades and thus causing an increase in prices for different investments. Many investors may take advantage of the rally to get into the market ahead of others.
More available money to invest: Many employers offer bonuses at the end of the year and some savvy investors use those bonuses to invest in stocks.
Established and predictable behavior: Since the Santa Claus rally happens almost every year, people tend to invest accordingly. And when people follow a pattern and expect it to recur, they effectively ensure that it will by repeating the behaviors that brought the pattern about in the first place.
Keep in mind that these reasons are just speculations. But there’s no arguing that the trend happens regularly, investors should consult with qualified financial professionals for advice specific to their particular circumstances.
Is the Santa Claus Rally Real?
Though the gains the market sees are historically minimal with an average of 1.3%, there’s no denying that the rally is real. It’s been observed 58 times since the S&P 500 became what we know it to be today in 1950.³ Though there’s no guarantee that the rally will happen every year—a lot depends on the market and the economy leading up to the holidays—historic trends suggest that the rally will continue to occur most years.⁴
The Santa Claus Rally is a time where slight gains may be seen in the stock market at the end of the year. The phenomenon happens most years, but the historical gains are minimal.
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