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Santa Claus is coming to town, but will he be visiting Wall Street this year? It’s a question that many hopeful investors have on their minds.
The gift of gains just makes the holiday season jollier. If you’ve been buying the dips and being nice, Santa might send you some extra stock market cheer.
What is a Santa Claus Rally?
The late December boost in stocks was classified and named by Yale Hirsch in 1972. Yale published the book titled “Stock Trader’s Almanac” which first cataloged the Santa Claus Rally.
He named it the “Santa Claus Rally” because the rise in stocks typically began on the first trading day after Christmas.
The market tends to act curiously bullish during the final trading days of the year. And investors have been enjoying the anomaly for decades.
When Does the Santa Claus Rally Start?
The Santa Claus rally officially begins the first trading day after Christmas and stretches into the first two trading days of January.
For 2020 this means the rally should begin December 28th and end on January 5th. That is a total of 6 trading days.
Why Does the Market Tend to Rally?
What causes the stock market to often drift higher during this time frame? Is it old Saint Nick himself blessing stocks? It could be, there isn’t a broadly accepted reason for the occurrence.
Here are some of the theories as to why stocks usually go up after Christmas:
- Holiday bonuses allow more retail investors to buy stocks.
- Low volume due to the time of the year, which makes it easier for the market to push higher.
- Tax-loss harvesting begins to slow down, and fewer people are selling.
- Investors buying in preparation for the January effect (stocks usually go higher in January too)
- Short sellers and institutions are on vacation, causing retail buying to have more of an effect.
Historical December Market Performance
Even though the Santa Clause Rally is the last five days of the year, December is historically a strong month for stocks.
From 1980 to 2019, the S&P 500 has returned an average of +1.11% in the month of December.
For the last few years, the December performance of the S&P 500 is as follows:
- December 2016 S&P return: +1.82%
- December 2017 S&P return: +0.98%
- December 2018 S&P return: -9.18%
- December 2019 S&P return: +2.86%
Other than the carnage in 2018, the market has recently done well in December.
Historical Santa Claus Rally Performance
According to the Stock Trader’s Almanac, the S&P 500 has returned a 1.3% average gain during the Santa Claus rally timeframe. This data averages performance from the 1950s to 2019.
Ari Wald at Oppenheimer has studied this event: Since 1928, the S&P 500 has averaged a 1.7% gain and traded higher 78% (70 out of 90 years) of the time through this seven-day period.
Will We Have a Santa Claus Rally in 2020?
2020 has been a hell of a year, to say the least. The markets have been extra volatile since the coronavirus pandemic and recession hit.
Suffice to say, we could all use some extra cheer in 2020, and another boost in stocks would be nice.
Statistically speaking, a Santa Claus Rally is likely to come this year. But here are a few reasons why you probably shouldn’t bet on it:
- The coronavirus is surging and causing another round of lockdowns.
- More stimulus is further away than the market is pricing in.
- A vaccine may take longer to distribute than anticipated.
- Election headwinds still linger.
Interstingly enough, if the market doesn’t have a Santa Claus Rally, it could be a sign of an incoming bear market.
Final Thoughts
Trading based on the Santa Claus Rally alone is probably not a good idea.
The holidays are a great time to take a break and enjoy visiting with family.
If you are trading during this time, try to stick with indicators that align with your trading plan.
Investors should consider any late December rally in stocks as just an additional holiday gift.
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