There’s a phenomenon that takes place at the end of most years called the Santa Claus Rally. It’s a name given to a pattern in the stock market over the last ﬁve trading days of the year, and the ﬁrst two trading days of the New Year where the stock market tends to do very well.
According to the 2018 Stock Trader’s Almanac, from 1969 to 2016, the Santa Claus Rally has yielded positive returns in the stock market in 36 of the past 48 holiday seasons. The average cumulative return over these seven days is 1.3 percent.
Other research over a longer period of time conﬁrms the same trend tends to be consistent. According to historical data going back to 1896, the Dow Jones Industrial Average has gained an average of 1.7 percent during this seven day trading period, rising 77 percent of the time.
A 1.7 percent return may not sound like much but to generate that kind of return in 7 days is a nice shot in the arm for most stock portfolios. If you averaged 1.7 percent every seven days for the 252 trading days in most years you would be making about 61 percent for the year.
So what causes the Santa Claus Rally? Nobody really knows for sure. Some of the more popular beliefs are that investors are more optimistic around Christmas time; that people are investing their Christmas bonuses; or investment managers are triggering last minute demand for stock by strategic buying and selling for tax reasons. Some like to believe it’s because all the market bears are on vacation.
Market watchers have noted that, in many years, following a failed Santa Claus Rally, where these seven days produced a negative return, the markets have not performed well.
For example, in the year 2000, the Santa Clause Rally failed for these 7 days, losing -4 percent, and the S&P 500 lost -10.10 percent for the full year. In 2008, the Santa Claus Rally broke down, losing 2.5 percent. Afterwards the market went on to lose over 38.5 percent for the full year, and turned out to be the second worst stock market crash in history. In 2015, the Santa Claus Rally lost -2.5 percent, and the S&P 500 was slightly down at -.7 percent, for the full year but the NYSE index considered a better measure of the broader markets lost over -6% in 2015.
While there’s some debate about whether there’s any logical reason for this end of the year rally, there is no question that this is a pattern that has been consistent over a long period of time. If you are a stock buyer hopefully Santa Claus will bring you another rally this year. Ho, ho, ho!
• Mike Piershale, ChFC®, RFC® is President of Piershale Financial Group. If you have financial questions on this column contact us at Piershale Financial Group Inc., 407 Congress Parkway, Crystal Lake, IL 60014. You may also email him at Mike@PiershaleFinancial.com.