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. Specifically, the chance of an up day for the S&P 500 during this period is 62% based on history.
That temporarily pushes down stock prices, but that trend is soon reversed as investors begin buying stocks again, pushing prices higher. A Santa Claus rally is a market rally that causes stock prices to increase during the holiday season, typically a seven-day period beginning the day after Christmas and ending on the second trading day in the New Year. The Santa Claus rally is used to describe the tendency for the stock market to rise in the last five trading days of the current calendar year and the first two trading days of the new year. The Santa Claus rally occurs when stocks rise over a seven-day trading period—starting the last five trading days of a year and continuing into the first two trading days of January in 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. Interestingly, the Santa Claus rally is observed in stock markets around the world. For example, the Indian stock market exhibits a similar effect, where the last five trading days of December and the first two trading days of January tend to produce higher average returns than other days. 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.
When does the Santa Claus rally start?
That may seem small, but if the markets delivered that consistently, then annual returns for the stock market would be roughly 50% per year. A challenge with these sort of calendar effects is that you can statistically test for them, but it’s harder to understand why they work. In this case, it’s possible that the effect has something to do with tax-loss harvesting.
If there’s a Santa Claus rally to end a year, the next year is expected to be good. There are many explanations for why Santa Claus rallies occur, but it is hard to pinpoint the exact reasons. Structured Query Language is a programming language used to interact with a database…. Once the Santa Claus rally is commonly known, it becomes a self-fulfilling prophecy. In this examination of the Santa Claus rally, we’ll discuss the origins of the rally, why it happens, and the history behind it.
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. However, it’s not a sure thing; your chance of an up day for markets during this period is still only a little better than six out of 10 based on history. That’s surprisingly good for the stock market, but certainly not enough create a sure thing. — a barometer of U.S. stock performance — has increased by 0.7% a year, on average, over those seven trading days, according to FactSet data. The S&P 500 was positive during those seven days in 15 of the 20 years — or 75% of the time, FactSet found. Some researchers believe one reason for the Santa Claus rally is bullish investors’ sentiment as people are generally optimistic around the holiday season.
To see if there is any validity to the proposition of a regularly occurring Santa Claus effect, we looked back at the last 20 years of performance of the Standard & Poor’s 500 (S&P 500) in the week leading up to Dec. 25. Based on our review of the data, we can state that there is minimal evidence of any discernible Santa Claus rally. The phenomenon, popularized by the Stock Trader’s Almanac in the early 1970s, refers to a tendency for the S&P 500 SPX to rally in the last five trading days of the calendar year and the first two trading days of the new year. A failure to rally in that stretch is seen by some analysts as a signal for more rough sledding ahead. It could also be related to window dressing as fund managers get their portfolios ready for end-of-year position reporting.
Understanding the Santa Claus rally
Of the average winning day in the period, the return was +1.85%, while the average losing day was -3.28%. 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.
The reality is that statistics put the proposition of a Santa Claus rally on the order of a split. 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. Over the last 20 years, the average winning day was just +1.85% against the average losing day of -3.28%, making the Santa Claus proposition even less attractive. There are numerous explanations for the causes of a Santa Claus rally, including tax considerations, a general feeling of optimism and seasonal happiness on Wall Street, and the investing of holiday bonuses. Part of the reason the Santa Claus rally may work is because it overlaps with the January effect.
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. U.S. stocks often gallop at year-end, delivering higher returns for investors. The trend, known as the «Santa Claus rally,» encompasses the last five trading days of the calendar year and the first two of the new year. 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.
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%. According to The Wall Street Journal, historically, the S&P 500, the Dow Jones Industrial Average , and the Nasdaq Composite have risen about 80% of the time during the Santa Claus rally period. The average returns for the S&P 500, the Dow, and the Nasdaq Composite over the period have been 1.3%, 1.4%, and 1.8%, respectively. Still, investors should be aware of how the market moves at different times of the year.
The September Effect is a calendar anomaly that refers to historically weak stock market returns for the month of September. 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. Traders pay attention to cyclical trends and, at times, find ways to exploit historical patterns. But it’s always a relatively random proposition, and the Santa Claus rally is no exception.
The Federal Reserve is poised to continue its cycle of raising interest rates during a policy meeting next week. The central bank began raising borrowing costs aggressively in March this year to tame stubbornly high inflation. «That is meaningful,» Batnick said of the difference in returns and positivity rate. 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.
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. Traders are commended to ignore the talk of a Santa Claus rally and instead stay focused on their own trading strategy and analysis. The historical statistics we looked at above suggest slightly better than odds that a stock rally will take place around Christmastime. However, there are also data points that suggest the rally is more of a shot.
Santa Claus Rally Definition
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. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. A bank holiday is a business day during which financial institutions are closed. The October effect is a theory that stocks tend to decline during the month of October. This supposed market anomaly, however, has little in the way of data to support it.
How Does A Santa Claus Rally Work?
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. If history is a guide, stock investors may be poised to get a gift over the holidays. Investors may already be reinvesting tax loss harvesting money at the end of December.
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The Dow Jones Industrial Average has performed better in years following holiday seasons in which the Santa Claus rally does not materialize. Several theories try to explain the Santa Claus rally, including investor optimism fueled by the holiday spirit, increased holiday shopping, and the investing of holiday bonuses. A larger-than-expected increase in interest rates or signs that inflation was hotter than anticipated could fuel stock-market jitters toward year-end. Bonds, typically a ballast when stocks are down, have also been in the doldrums; the Bloomberg U.S. Aggregate bond index, a barometer of U.S. bonds, is down 11% in 2022.
The unlikeliness of the government or regulators announcing any bad news during the holidays may be the driving force behind this optimism. Santa Claus rally is an increase in stock markets in the last week of December and the first days of January. However, a Santa Claus rally isn’t always an accurate predictor of gains the next year. In 2021, the S&P 500 gained 1.4% in the seven-day period, but the market peaked on Jan. 3 and entered a bear market in June, falling more than 20% as the Federal Reserve Board aggressively raised interest rates.
Although there’s no clear expectation for the Santa Claus rally, history has shown that stocks often outperform during the end-of-the-year period. Stocks usually rise over the last five days at the end of the year and the first two days of the following year. Based on the results since 1994, the behavior of stocks during the Santa Claus rally is also usually an accurate predictor of the direction of the stock market for the following year. End-of-year bonuses and gifts during the holidays give people money to invest in the stock market. 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.