The last few days of December can be an exciting time for children who believe in Santa Claus — and for adults who love the holiday season, too. They can be equally exciting for investors!
That’s due to the so-called “Santa Claus Rally.”
This is a relatively reliable phenomenon in which the market delivers a short, sharp rally over the last five trading days of December and the first two of January, as measured by the S&P 500 index. According to the Stock Trader’s Almanac, this rally has been good for an average 1.3% gain, on average, since 1950. The Santa Claus rally phenomenon was discovered in 1972 by Yale Hirsch, the founder of the Almanac.
This year, that rally — if it happens — would begin on Wednesday, Dec. 24, and last through Monday, Jan. 5.
Sadly, Santa is a bit unreliable. Last year, the S&P 500 lost about half a percentage point over those seven trading days. Yet, in some years, the rally is dramatic. The market rose over those seven days every year from 2016 through 2022, and in four of those years, the gain was 1% or greater.
What causes this year-end rally in the market?
There are several reasons market observers cite for it. They include general optimism around the holiday season, the arrival of year-end bonuses and consequent stock buying, the end of tax-loss harvesting and the resumption of stock purchases by investors, and the fact that many institutional investors take vacation during the period, which allows smaller retail traders to have a bigger effect.
Part of it could also be a good old self-fulfilling prophecy, as investors who believe in the rally buy into it.
Interestingly, there’s even more to the Santa Claus rally. The Almanac found that a bear market often follows in years when there is no end-of-year rally.
There’s even an adage describing it: “If Santa Claus should fail to call, bears may come to Broad and Wall.” (The New York Stock Exchange is on the corner of Broad and Wall Streets.)
This year, the prospect of a Santa Claus rally looks a bit iffy. Investors were disappointed this week after jobs numbers came in and were somewhat mediocre, indicating that job creation may be slowing in the U.S. economy.
