The holidays are upon us once again and Wall Street is waiting to see if Santa will spread a little holiday cheer on the stock market at the end this year. Like the Christmas shopping season the term “Santa Claus Rally”, seems to be used earlier every year. Any slight change in the stock market from November to December and a race ensues to see who can use the “Santa Claus Rally” term first.
The media, as usual, tends to jump the gun on the Santa Claus Rally. The stock market has many seasonal market indicators. They tend to be very specific time periods and most are backed by significant historical data.
So what is the “Santa Claus Rally”? The theory is that the stock market performs well in the period between Christmas and the first few trading days of the New Year. Since 1945 there has been a 1.6% average gain in the market during this time period. This by no means guarantees there’s a Santa Claus Rally every year. The downside is on years when the Santa Claus Rally doesn’t occur, the next year tends to be a down year.
What Causes the Santa Claus Rally?
Nobody knows what exactly causes the Santa Claus Rally to occur, however several theories get tossed around every year:
- Investors are more optimistic around Christmas
- People are investing their Christmas bonuses
- People are planning ahead for tax considerations
- Holiday sales figures tend to offer up positive headlines
- Fund Managers rebalancing their portfolios
- Year-end investment reports typically have a rosier outlook of the new year
- All the pessimists are on vacation
When you combine all of these reasons and more, the Santa Claus Rally tends to be one of the more consistent seasonal market indicators. If Congress can pass a last minute extension of the Bush tax cuts, it certainly will provide a boost to a possible rally this year.
Whether the Santa Claus Rally happens again this year, we want to wish you all a Happy Holidays and a Prosperous New Year!