The Santa Claus rally is just one of many seasonal indicators Yale Hirsch and other technical analysts claim to have discovered. From 1987 through 2016, no evidence of a Santa Claus rally exists in the S&P 500, according to a statistical analysis by Brigid Cami, then a master’s student at the University of Toronto. “Attempting to time the market, especially on the basis of past performance, carries a lot of risk,” he says. This section aims to clarify common inquiries about the Santa Claus Rally and its implications for the stock and cryptocurrency markets, supported by research findings. Still, it remains a topic of debate as to whether it’s a reliable pattern or a market anomaly driven by specific circumstances.
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Any positive gain in the stock market around Christmas commonly leads financial market observers to refer to the Santa Claus rally. “These include the markets getting a boost as fund managers position for the year ahead, investing spare cash in their funds before the holiday break to ‘window dress’ their portfolios ahead of reporting periods. Analysis by Bestinvest shows the MSCI World Index has posted positive returns 74% of the time during December over the past 50 years.
- A higher volume of trades generally indicates a stronger interest in the traded stocks, which can drive up prices.
- It is also a period where institutional activity can help stabilize market volatility, reinforcing the gains typically seen.
- The Santa Claus rally refers to gains in the market that frequently occur during the last five days of a calendar year and the first two days of the following year.
- We develop high-quality free & premium stock market training courses & have published multiple books.
What this means for the current market
This phenomenon is observed in various financial markets worldwide, with the primary focus often on the American stock market. 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. The Santa Claus Rally refers to a phenomenon in the stock market characterized by an increase in stock prices during the last weeks of December through the first two trading days in January. 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.
Santa Claus Rally Explained: Is it Real? We Test It!
In their research, Washer, Nippani, and Johnson discovered that returns tend to be higher during this period. They further observed that this effect is significantly more pronounced for small-firm portfolios than large capitalization portfolios. Additionally, the authors present compelling evidence suggesting that the last trading day in December and the first two trading days in January have substantial influence, particularly on small stock portfolios.
Historical Data
This period often enjoys an average return that outperforms the market’s general trend. A Santa Claus rally is a 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. A Santa Claus rally in the stock market refers to the tendency for the S&P 500 to increase in the final five trading days of December and the first two days of January in the new year. 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.
In contrast, the average month has typically seen positive returns 62% of the time. In December 2008, amid a 17-month bear market during the global financial crisis, and again in both 2020 and 2021 during the pandemic, markets delivered positive momentum during the festive period. 2009 is committed to honest, unbiased investing education to help you become an independent investor. We develop high-quality free & premium stock market training courses & have published multiple books. No, my research shows USD vs Bitcoin tends to rally in Weeks 1 to 4 in January with a +8% mean change per week. A higher volume of trades generally indicates a stronger interest in the traded stocks, which can drive up prices.
Our evidence shows mean stock price increases in October +1.74%, November +2.40%, and December +0.56%. Weekly evidence shows week 52 is the strongest, with 68% increasing an average of 0.86%. Whether the stock market can sustain the rally in 2024 is still an open question. Some prognosticators expect the Fed’s interest-rate hikes to squeeze the economy, which could rein in stocks following the recent 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 fusion markets review 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. 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.
According to the data table, there is evidence of the Santa Claus Rally in the S&P 500. The table displays the percentage change in the number of stocks during different months of the year. Using up-to-date seasonality charting with TrendSpider, we can look back decades into the performance of the S&P 500 to see if the https://broker-review.org/etoro/ data shows the reality of the Santa Rally. Research into the Santa Claus Rally suggests that the effect is not uniform across all stocks and may vary by firm size. It has been posited that both small and large firm stocks tend to perform better during the rally period, although the reasons remain a subject of analysis.
In 2018, the S&P 500 finished the month with a 6.6% gain after December 24, which were the last four trading days of the month. Although the index fell on Jan. 3 — the second day of the new year — December 24 proved to be the market bottom. 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.
“I believe January will test the market, as earnings dominate and the Fed meets (to determine interest rates) Jan 31-Feb 1,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “If earnings don’t pan out, we could quickly test the 3550 level” in the S&P 500 index. Between Dec. 20, 2021 and Jan. 4, 2022, a Santa Claus rally pushed the S&P 500 up almost 5%, with the index posting a new closing high on the first trading day of the year. If Santa’s a no-show, the S&P 500 historically underperforms in January and over the following year. The S&P 500 on average drops 0.3% and returns only 4.1% for the new year 66.7% of the time, LPL said.
It is also a period where institutional activity can help stabilize market volatility, reinforcing the gains typically seen. Investor sentiment during the holiday season can be buoyed by increased optimism and holiday cheer, which often translates into more bullish behavior in the stock markets. The festive mood encourages investors to participate more actively, resulting in a general uptick in stock prices. The psychology of market participants plays a crucial role, as the collective mood tends to be more positive. The Santa Claus Rally refers to the tendency for stock prices to rise in the final week of December through the first two trading days in January.
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. 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. 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%.
If you’re looking for some insight into next year’s stock-market performance, keep an eye out to see if we get a Santa Claus rally this year. On the surface, the current stock market seems to have little in common with 2008, when stocks were in free fall. There are also competing patterns coming in 2023, which is the third year of the presidential cycle with https://broker-review.org/ the mid-term election year, the weakest of the cycle historically, in the past. Since 1950, the third year of a presidential cycle has averaged a return of 16.8% versus 6.0% for year two, LPL Financial said. Additionally, the first quarter of year three of the presidential cycle also has been the strongest of the four quarters that year, it said.
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. Yale Hirsch followed stock market history and patterns and founded the Stock Trader’s Almanac in 1968. The almanac introduced the public to statistically predictable market phenomena such as the “Presidential Election Year Cycle”, “January Barometer,” and the “Santa Claus Rally.» 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.
For the purposes of the Santa Claus rally, the stock market is considered to be the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite. All three seemingly exhibit the phenomenon despite representing different parts of the market and having different makeups over the years. For a year to meet the “rally” definition, returns merely need to be positive. Thus, one can say the market has enjoyed a Santa Claus rally whether the return was 7.2% over that period, as it was in 1974, or 0.0003%, as it was in 2006.
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. At the time it highlighted the tendency for the stock market to rise by 1% to 2% during the final five trading days of the outgoing year and the first two of the new year. However, if historical patterns hold, an uptick in stock prices could be observed during the holiday period. To summarize the data, it showcases the occurrence of the Santa Claus Rally on a weekly chart.
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. For example, according to data compiled by LPL Research and FactSet, the Santa Claus rally period in 1999 saw the S&P 500 drop 4% and the Dotcom bubble burst in 2000.
For reference, the chart below compares the results of trading in any random six-day period in the past 26 years with the results 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. 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 festive season could bring more cheer to investors and the wider equity market though as data shows that stock markets tend to experience a yuletide boost at this time of year, dubbed the Santa Rally. Although data has shown that the Santa Claus rally period has generated more positive returns than negative returns, there is no way for traders/investors to predict whether it will happen again. It is important to note that past performance is not indicative of future results. One is that stocks rally in the week between Christmas and New Year’s, and that carries into the second day of trading in the New Year, usually Jan 2.
Liquidity refers to how easily stocks can be bought or sold in the market without affecting the asset’s price. These metrics provide insight into the strength of the market and the potential for a sustained rally. The chart below provides evidence of the Santa Claus Rally in the S&P 500 over 31 years.
Without this sign, we get a brief, self-perpetuating burst of bullish activity. UK equities have performed even better during December, according to Bestinvest, with the MSCI United Kingdom Index posting positive returns 82% of the time during December. December has unwrapped positive returns on 80% of occasions for the FTSE 100, and 77% for the S&P 500 during the past three decades, according to Fidelity.
If Santa delivers a rally, the S&P 500 on average gains 1.3% in January and 10.9% for the new year 75.4% of the time, LPL said. Mercedes Barba is a seasoned editorial leader and video producer, with an Emmy nomination to her credit. Presently, she is the senior investing editor at Bankrate, leading the team’s coverage of all things investments and retirement. But this compensation does not influence the information we publish, or the reviews that you see on this site.
