What is “The Santa Claus Rally”?
The Santa Claus Rally is a stock market phenomenon (or calendar effect) that occurs during the year. It encompasses seven trading days – the last five days of the year and the first two days of the new year. While Santa doesn’t always visit Wall Street every year, when he does, he provides a presentation to investors in the form of positive returns.
If we look at historical market performance, we can see that since 1950, the S&P 500 was up on average 1.3% during those seven days. In addition, the S&P 500 advanced higher during that seven-day period in 34 of the previous 45 years., or about 76% of the time. However, over the 10-year period from 2010 – 2020, the S&P 500 experienced a more muted Santa Claus Rally of 0.38%, on average. In fact, during this 10-year period, the S&P 500 experienced some declines during those seven trading days. For example, investors got a lump of coal in their stockings as the S&P 500 declined 3.01% from 2014 – 2015 and a decline of 2.27% from 2015 – 2016.
While the causation of the Santa Claus Rally has yet to be determined, at Zynergy we think it is a combination of certain events that take place at the end of the year. These include, but are not limited to:
- Investors have a feeling of optimism for the new year ahead
- Investors are in a cheerful holiday spirit
- End-of-the-year bonuses are paid and invested
- Investors who performed tax-loss harvesting in the Fall are ready to reinvest those proceeds
- Institutional and mutual fund managers purchase additional stocks to their portfolios that have done well over the past year.
- As institutional investors take off the week after Christmas, trading volumes tend to be lower. This gives the retail investor more influence on the markets, and retail investors tend to be more optimistic than institutional investors, causing the market to head higher.
While the Santa Claus Rally occurs more often than not, it is not a lock to happen yearly. Therefore, when it comes to investing, it is essential to focus on the long term. It is never wise to make investment decisions based on short-term market phenomena, as market sentiment can change very quickly, leaving you stuck “holding the bag.”