April 21, 2024

Now that Halloween is over it is Mariah Season. I know what I want for Christmas, but is it real?


If you spend time on social media, especially FinTwitter, YouTube or MoneyTok, you must have heard of the Santa Claus Rally. 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.


Is there any truth to this and why do retail investors make such a big deal about this?

The theory is based on a few assumptions and some facts.

  1. People tend to be in higher spirits over the holidays and spending more.
  2. End-of year bonuses, so people have money to invest in the markets (those who dont shop till they drop in malls.
  3. Institutional investors close over the holidays and they need to settle the books they manage on behalf of clients before they go away.
  4. When the conservative institutional investors go on holiday, they leave the market over to the more optimistic retail crowd.


The Numbers

Attached is the past 20 years performance of the so-called Santa rally.

  • 3 negative years, largest movement in 2018 of -10.7%
  • 8 relatively flat years
  • 9 positive years, largest movement in 2021 of 5.4%


The average return over the 20 year time period was +0.385%, or effectively flat. As we know, numbers do not lie, so we need to conclude that the Santa Rally is as real as Santa himself.


Stock market commentators love to turn any market gain around Christmas into a so-called Santa Claus rally, because it gives them something to talk about and it explains a day's gain at that time of year, but if we look at the overall statistics, we should stick to our strategies and enjoy the holidays, like we are supposed to.


Have you ever heard of the January Effect? I will share that next time.


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