Santa Claus Rally In Stocks: What It Means For Investors
Most estimate these rallies happen in the week leading up to the Christmas holiday, while others see trends that begin Christmas Day through Jan. 2. 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 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%.
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. 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. 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 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.
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. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. Just like other calendar effects in the stock market, observers disagree over whether the Santa Claus rally is valid or useful.
The other time-span definition—and our preferred one—is the week leading up to Dec. 24. But both time periods show negligible returns at best on average, making the Santa Claus rally something of a myth, just like the jolly old elf himself. Over the years, many analysts have tried to speculate about the reasons for the Santa Claus rally. The perceived How to find momentum stocks causes for the rally include an overall, holiday-season spirit, in which retail traders hold an outsize bullish outlook and institutional players tend to step back from the market. Some researchers believe one reason for the Santa Claus rally is bullish investors’ sentiment as people are generally optimistic around the holiday season.
The week before Christmas typically has normal to significant volume, compared with the week after Christmas, which is usually marked by generally sideways stock-price movement with small ranges. 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 first appearance of the term “Santa Claus rally” came in 1972 when market analyst Yale Hirsch discovered that market returns were abnormally high in the days after Christmas and leading up the first few days of the New Year.
- Interestingly, the Santa Claus rally is observed in stock markets around the world.
- 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.
- Also, many employees receive year-end bonuses that can be invested in the market.
- 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.
- 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.
- Also, because it is unclear exactly why the Santa Claus Rally occurs, it is impossible to predict whether those influences will recur in any given 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. 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.
In addition, investors who believe in the January effect might hope to bolster their returns by snapping up shares at the end of December that they expect to rise soon thereafter. When investors consider data that spans 20 years of performance of the Standard & Poor’s 500 (S&P 500) in the week leading up to Dec. 25 from 2002 to 2022, there is minimal evidence of any discernible Santa Claus rally. Based on the S&P 500, there were 13 weeks with a positive return, five with a negative return, and two with no change. Yale Hirsch, the founder of the Stock Trader’s Almanac, coined the “Santa Claus Rally” in 1972. He defined the timeframe of the final five trading days of the year and the first two trading days of the following year as the dates of the rally.
Not only that, but it achieved this finding using a less-generous timeframe that aimed to eliminate the positive influence of a possible January effect. It only analyzed returns for the four or five trading days, depending on the year, between Christmas and New Year’s. The holiday season might have investors feeling more optimistic, especially with corporations and governments reluctant to announce bad news during this period if they can avoid it.
Why Does A Santa Claus Rally Happen?
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 https://www.day-trading.info/how-u-s-treasury-yields-affect-the-economy-2020/ 80% of the time), with growth in the S&P 500 by 1.4%. Like the jolly bearded man it is named after, no one knows the definitive reason why a Santa Claus Rally arrives in December and often gifts investors with positive returns through the holidays.
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The second major question is whether the Santa Claus rally really even exists. 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. Regardless of the mechanics behind the rally, it’s an observable effect and it occurs roughly two out of three years, so investors should be prepared to see whether Santa shows up at the end of each year. If it’s that simple, analysts should do us all a favor and promulgate more calendar effects beyond the presidential election year cycle, January barometer and best six consecutive months.
If there’s a Santa Claus rally to end a year, the next year is expected to be good. The study also examined returns in 15 other developed countries, so the total sample included eight countries where a majority of residents identify as Christian and eight where they don’t. The flaw with this theory is that there is no single time of year when most corporations pay bonuses; it varies by company.
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If you’d like to draw your own conclusions, here are some additional points to consider. Each year, when the days are at their shortest and retail workers’ shifts are at their longest, market pundits speculate about the likelihood and magnitude of a year-end surge in stock prices. For buy-and-hold https://www.topforexnews.org/books/top-reasons-forex-traders-fail/ investors and those saving for retirement in 401(k) plans, the Santa Claus rally does little to help or hurt them over the long term. It is a news headline happening on the periphery but not a reason to become more bullish or bearish during Santa Claus rallies or the January Effect.
Santa Claus rally in stocks: What it means for investors
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. While Santa Claus can be counted on to deliver the presents on Christmas, the stock market cannot be relied upon for gifts. Any positive gain in the stock market around Christmas commonly leads financial market observers to refer to the Santa Claus rally.
Strategies may include a stop-loss level and a plan for what to do if the trade is neither profitable nor stopped out by Christmas. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns. 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.