Santa rally: What Is a Santa Claus Rally?
Some analysts believe that it’s caused by the completion of tax-loss harvesting. Professional investors often adjust their portfolios at the end of the year for tax purposes by selling stocks at a loss. That temporarily pushes down stock prices, but that trend is soon reversed as investors begin buying stocks again, pushing prices higher. The Santa Claus rally describes the tendency for stock markets to rise in the last trading week of December and the first two trading days of the new year. Similarly in 2008, during the stock market crash caused by the financial crisis, stocks actually got a Santa Claus rally in the midst of a larger bear market rally. During the seven-day period, the S&P 500 gained 7.5%, although it would crash again in the first two months of 2009 before bottoming out on March 9.
This is the tendency of the market — especially for smaller, value stocks that have been beaten down over the prior year — to rally in the early days of January. Specifically, the chance of an up day for the S&P 500 during this period is 62% based on history. This implies that the chances of the market rising around the holidays are higher than average, for comparison the chance of the S&P 500 rising on any given day is 53%. Santa Claus rally is an increase in stock markets in the last week of December and the first days of January. Since 1950, the S&P 500 has gained an average of 1.3% during the seven-day period in which the rally takes place, and it’s gained in 34 of the past 45 years.
Will a Santa Claus Rally Occur in 2022?
Automated rules for investing to put money to work at the start of the year could also impact market trends during this period. It’s also an effect that appears to have persisted, despite widespread research on the topic. Part of the reason the Santa Claus rally may work is because it overlaps with the January effect.
For buy-and-hold investors and those saving for retirement in 401 plans, for example, the Santa Claus rally does little to either help or hurt them over the long term. It is an interesting news headline happening on the periphery but not a reason to become either more bullish or bearish. A better strategy is to maintain a long-term investment outlook and not be tempted by the promise of Santa Claus rallies or the January Effect. Facet Wealth, Inc. (“Facet”) is an SEC registered investment adviser headquartered in Baltimore, Maryland. This is not an offer to sell securities or the solicitation of an offer to purchase securities.
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By definition, the Santa Claus rally refers to gains in the market that typically happen in the last five days in one year and the first two days of the next. The term is sometimes used to refer to any rally that takes place around the end of the year. 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. The reality is that statistics put the proposition of a Santa Claus rally on the order of a split. Not necessarily a firm basis to be long the market heading into Christmas. The risk/reward proposition (how much you’re likely to win on a winning day versus how much you could lose on a losing day) is also decidedly negative.
But it’s always a relatively random proposition, and the Santa Claus rally is no exception. The Santa Claus rally refers to the tendency for the stock market (specifically, the S&P 500) to rally over the week leading up to Christmas (Dec. 25). If it’s clear we can help, and you want to learn more about working with Facet, then we will share what the service will cost based on the complexity of your finances. In the last 71 years, the S&P 500 index has risen annually by 1.3% over those seven days , based on research from Michael Batnick, managing partner at Ritholtz Wealth Management, via CNBC. Whatever the reason for the Santa Claus rally, investors can use a bit of good news. “Midterm elections, no matter what, have a tendency to be very bullish, and the Santa Claus rally continues through the next three, six, 12 months,” he said.
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More active investors, however, may want to make their portfolios more aggressive to try to make the most of the rally and use the appearance of the rally as an indicator for how to invest in the year ahead. Some investors use the existence of Santa Claus rallies as indicators for the coming year. If there’s a Santa Claus rally to end a year, the next year is expected to be good.
What It Means for Individual Investors
Yale Hirsch first documented the pattern in 1972, writing in “Stock Trader’s Almanac” that the S&P 500 had gained an average 1.5% during that seven-day period from 1950 through 1971. The pattern has held true since 1950, with the broad market index increasing an average of 1.3%. Additionally, the market has gained during those days in 34 of the previous 45 years, or more than 75% of the time. The January Effect is the tendency for stock prices to rise in the first month of the year following a year-end sell-off for tax purposes.
The January Effect
This makes sense if you think about it, as many market participants will take care of year-end position adjustments in the week before Christmas, while there is still plenty of liquidity. Further, this lull is most likely due to market participants taking the holiday break between Christmas and New Year’s. As such, for the purposes of this article, we will assign the week leading up to Dec. 25 as having the greatest potential for a “Santa Claus rally.” Full BioBrian Dolan’s decades of experience as a trader and strategist have exposed him to all manner of global macro-economic market data, news and events. His expertise spans the spectrum from technical analysis to global macroeconomic data and events. Testimonials were provided by current clients of Facet Wealth, Inc. (“Facet”).
In this case, it’s possible that the effect has something to do with tax-loss harvesting. That’s when investors sell losing investments for tax reasons, often around the end of the year, and then buy back into the markets to improve their short-term tax position. That may seem small, but if the markets delivered that consistently, then annual returns for the stock market would be roughly 50% per year.
Over the last 20 years of following the Santa Claus rally proposition, the average return was only +0.385%, which we do not consider a viable trade opportunity for any but the most nimble of traders. Overall, the markets will be driven by factors including valuation, earnings trends, recession risk in the U.S. and the path the Federal Reserve decides to take with interest rates. Still, there’s a good chance based on history that the final few trading days of 2022 and the start of 2023 could prove positive for stocks. 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. Depending on when weekends fall in a particular calendar year, the start of a Santa Claus rally could be before or after Christmas Day.
Only the Nasdaq Composite reported a loss in one year during the same period. After Hirsch wrote about the pattern, it seemed to become part of the investing lexicon by the early 2000s when a number of references were made to the term in the financial media. Like other calendar effects, including the January effect and phrases such as, “Sell in May and go away,” there is strong evidence that the Santa Claus rally is real and can predict the market’s outcome. The Dow Jones Industrial Average has performed better in years following holiday seasons in which the Santa Claus rally does not materialize. Also, there is some research that points tovalue stocksoutperforminggrowth stocksin the month of December overall.
Investors buy stocks ahead of an anticipated rally in January, known as the January effect, which may come from reinvesting money after tax loss harvesting in December. Trading volume tends to be low since institutional investors take off the week after Christmas. The market can be more volatile and give more influence to retail investors, who tend to be more bullish.
A financial reset is an excellent way to change how you think about money, improve your finances, and realign your money habits with your values. AFP via Getty ImagesDespite a dismal December so far for markets, there is still a chance for a Santa Claus rally late in 2022, if history is any guide. An example of a big Santa Claus rally occurred in December 2008 going into January 2009. A seven-trading day period starting Dec. 24, 2008, and ending Jan. 5, 2009, saw the S&P 500 gain 7.36%. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns. Traders pay attention to cyclical trends and, at times, find ways to exploit historical patterns.