Is Santa Clause Coming To Town?

History

Yale Hirsch, the founder of the annual Stock Trader's Almanac, coined the "Santa Claus Rally" in 1972 for the likely market performance during the last five trading days of December and the first two trading days of January (12/ to 1/ this year). But the history of the Santa Claus rally dates to the early 1900s. In 1942, author Sidney B. Wachtel presented the analysis in "The Journal of the Business of the University of Chicago." Wachtel used the Dow Jones Industrial Average (DJIA) to study the effect from 1927 to 1942.

While past performance doesn't guarantee future results, the period has posted higher stock prices about 79% of the time since 1950. The S&P 500 index has averaged a 1.3% gain during this time. When stocks decline during this period, significant market downturns have often followed. For example, in 1999, a 4% decline during the Santa Claus rally period was followed by the Dow's 37.8% slide over the next 33 months, and in 2007, a rally period decline preceded the 2008 financial crisis.

Possible Causes

One theory is that greater consumer spending during the holiday season leads to positive retail earnings, giving investors confidence and increasing stock prices. Another factor is the general mood in the market. Investors often feel more optimistic around the holidays, buying more stocks. They rebalance their portfolios and invest year-end bonuses. Trading activity among individual and institutional investors trends lower, leading to lower market volumes and upward price movements, that allow the Santa Claus rally to thrive.

Approach with Skepticism

It's smart to be aware of market conditions and focus on long-term investing strategies rather than relying on seasonal trends. Monitor your investments and overall market conditions, and stay in touch with your financial professional about how your investments could behave during this unique time.