What Is a Santa Claus Rally?

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what is santa rally

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. A Santa Claus rally is a https://www.forex-world.net/ 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. In the past two decades, the S&P 500 Index — a barometer of U.S. stock performance — has increased by 0.7% a year, on average, over those seven trading days, according to FactSet data. The S&P 500 was positive during those seven days in 15 of the 20 years — or 75% of the time, FactSet found.

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. 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 80% of the time), with growth in the S&P 500 by 1.4%. However, a Santa Claus rally isn’t always an accurate predictor of gains the next year.

what is santa rally

A Santa Claus rally has occurred 59 times since 1950, according to the Stock Trader’s Almanac. Some market commentators may casually refer to a Santa Claus rally at any point in December. Long-term investors, such as those saving for retirement, can generally ignore whether or not the stock market has a Santa Claus rally. Market performance over seven trading days is barely a blip over the course of an investing life, so trying to react to a potential rally is typically a mistake.

Understanding the Santa Claus rally

This rally brought some respite to the index that had, until then in the year, dropped more than 40%. For buy-and-hold 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 https://www.day-trading.info/ bullish or bearish during Santa Claus rallies or the January Effect. 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.

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  3. Some market observers may also make forecasts based on whether or not a Santa Claus rally occurs.
  4. “When you think of a Santa Claus rally, it’s all about anticipating or looking forward,” said Terry DuFrene, global investment specialist at J.P.

However, short-term traders may take more action in the hopes of positioning themselves for a rally. They may buy stocks or stock funds ahead of the end of the year and look to sell them once a rally has taken place. But this compensation does not influence the information we publish, or the reviews that you see on this site.

How Does A Santa Claus Rally Work?

Similarly, corresponding trading days in 2007 saw the S&P 500 drop 2.5%, and 2008 saw the Great Recession. Observing the Santa Claus rally is common, but trying to trade the phenomenon is another matter. 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.

There are many explanations for why Santa Claus rallies occur, but it is hard to pinpoint the exact reasons. 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. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. For example, in 2018, the S&P 500 fell through much of the fourth quarter as Treasury yields rose. 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.

The precise cause for a Santa Claus rally is difficult to identify, with different factors impacting markets from one year to the next. Some of the reasons given for a year-end rally include the general optimism around the holidays, people investing holiday bonuses and an increased influence from individual investors. 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.

what is santa rally

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. Today, market commentators may refer to a Santa Claus rally when the stock market rises during the month of December, particularly around the Christmas holiday. A Santa Claus rally is the tendency for the S&P 500 index to increase over the final five trading days of December and the first two trading days of January. By definition, the Santa Claus rally refers to gains in the market that typically happen in the last five days in one year and the first two days of the next. The term is sometimes used to refer to any rally that takes place around the end of the year.

How Was the Idea of the Santa Claus Rally Introduced?

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. By comparison, S&P 500 returns were a much smaller 0.24% during all other seven-day trading periods dating to 1950, Batnick said.

However, there is no clear cause for the Santa Claus rally, and there’s no guarantee that it will continue. For reference, the chart below compares the results of trading in any random six-day period in the past 26 years with the results https://www.investorynews.com/ of trading two kinds of six-day groupings. The first is the turn-of-month effect, four sessions at the end of a month and two sessions into the next month. The second is specifically the returns from trading the Santa Claus rally belief.

Some of the theories that aim to explain both the Santa Claus rally and the January Effect have received criticism. 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%. Between 1926 and 1950, it existed as the Composite Stock Index, tracking 90 stocks. 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. Since 1950, the S&P 500 has gained an average of 1.3% during the seven-day period in which the rally takes place, and it’s gained in 34 of the past 45 years.

Many individuals will see the most benefit from long-term investing in diversified mutual funds. 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. That temporarily pushes down stock prices, but that trend is soon reversed as investors begin buying stocks again, pushing prices higher. An example of a big Santa Claus rally occurred in December 2008 going into January 2009. A seven-trading day period starting Dec. 24, 2008, and ending Jan. 5, 2009, saw the S&P 500 gain 7.36%.