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what is santa rally

The week before Christmas typically has normal to significant volume, compared with the week after Christmas, which is usually marked by generally sideways stock-price movement with small ranges. The week before Christmas also captures much of the end-of-the-year adjustments from institutional players seeking to close their books before the Christmas holiday. The week after Christmas usually comes with much lower volume, suggesting that institutional players have withdrawn from the market for the rest of the year. There’s also the argument that holiday shopping can bolster businesses’ bottom lines and help boost stock prices. Also, many employees receive year-end bonuses that can be invested in the market.

what is santa rally

According to Yale Hirsch, the first two trading days in January are included in the rally. Investors may buy stocks in anticipation of the rise in stock prices during January, otherwise known as the January Effect. Some research points to value stocks outperforming growth https://www.currency-trading.org/ stocks in December. 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.

Many individuals will see the most benefit from long-term investing in diversified mutual funds. 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 https://www.forex-world.net/ pushes down stock prices, but that trend is soon reversed as investors begin buying stocks again, pushing prices higher. 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%.

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Still, investors should be aware of how the market moves at different times of the year. 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.

In 2018, the S&P 500 finished the month with a 6.6% gain after December 24, which were the last four trading days of the month. Although the index fell on Jan. 3 — the second day of the new year — December 24 proved to be the market bottom. Using the week leading up to Dec. 24 over two decades, we find there is no tangible or reliable Santa Claus rally. Whether you count that time period or the week after Dec. 25 up to Jan. 2 of the new year, the returns are negligible, if slightly positive at +0.385%. For example, according to data compiled by LPL Research and FactSet, the Santa Claus rally period in 1999 saw the S&P 500 drop 4% and the Dotcom bubble burst in 2000.

Some of the theories that aim to explain both the Santa Claus rally and the January Effect have received criticism. According to data compiled by Stock Trader’s Almanac in the 70 years between 1950 and 2020, a Santa Claus rally has occurred 57 times and has, on average, seen the S&P 500 go up by 1.3%. Between 1926 and 1950, it existed as the Composite Stock Index, tracking 90 stocks. When investors consider data that spans 20 years of performance of the Standard & Poor’s 500 (S&P 500) in the week leading up to Dec. 25 from 2002 to 2022, there is minimal evidence of any discernible Santa Claus rally. Based on the S&P 500, there were 13 weeks with a positive return, five with a negative return, and two with no change. 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.

How Does A Santa Claus Rally Work?

The precise cause for a Santa Claus rally is difficult to identify, with different factors impacting markets from one year to the next. Some of the reasons given for a year-end rally include the general optimism around the holidays, people investing holiday bonuses and an increased influence from individual investors. 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. Another theory is that this is the time of year when institutional investors go on vacation, leaving the market to retail investors, who tend to be more bullish.

Similarly, corresponding trading days in 2007 saw the S&P 500 drop 2.5%, and 2008 saw the Great Recession. Observing the Santa Claus rally is common, but trying to trade the phenomenon is another matter. Strategies may include a stop-loss level and a plan for what to do if the trade is neither profitable nor stopped out by Christmas.

Yale Hirsch, the founder of the Stock Trader’s Almanac, coined the “Santa Claus Rally” in 1972. He defined the timeframe of the final five trading days of the year and the first two trading days of the following year as the dates of the rally. By comparison, S&P 500 returns were a much smaller 0.24% during all other seven-day trading periods dating to 1950, Batnick said.

But both time periods show negligible returns at best on average, making the Santa Claus rally something of a myth, just like the jolly old elf himself. There are two schools of thought about the timing of the Santa Claus rally effect on the Standard & Poor’s (S&P) 500 Index. The first suggests the Santa Claus rally occurs in the week leading up to and ending with Dec. 24, Christmas Eve. The other scenario https://www.investorynews.com/ suggests the Santa Claus rally occurs in the week following Christmas, up to and including the first two trading days of the New Year. After studying the returns of both scenarios, we believe the Santa Claus rally, to the extent that it exists, occurs in the week leading up to Christmas. A Santa Claus rally is the sustained increase in the stock market that occurs around the Christmas holiday on Dec. 25.

  1. The first appearance of the term “Santa Claus rally” came in 1972 when market analyst Yale Hirsch discovered that market returns were abnormally high in the days after Christmas and leading up the first few days of the New Year.
  2. There are two schools of thought about the timing of the Santa Claus rally effect on the Standard & Poor’s (S&P) 500 Index.
  3. Additionally, the market has gained during those days in 34 of the previous 45 years, or more than 75% of the time.
  4. They may buy stocks or stock funds ahead of the end of the year and look to sell them once a rally has taken place.
  5. 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. On Tuesday, Americans will get a look at whether inflation eased further in November, when the U.S. Bureau of Labor Statistics issues its latest monthly consumer price index report. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. For example, in 2018, the S&P 500 fell through much of the fourth quarter as Treasury yields rose. 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.

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. 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.

How Was the Idea of the Santa Claus Rally Introduced?

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. For the average return of the week leading up to Christmas, the so-called Santa Claus rally, we calculated a +0.385% total return, with 13 winning weeks, five losing weeks, and two unchanged weeks. More important, the average winning week gave a +1.85% return, while the losing weeks averaged a -3.28% return, skewing the risk/reward ratio against the trade (being long S&P 500).

Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range, can also impact how and where products appear on this site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service. Some market observers may also make forecasts based on whether or not a Santa Claus rally occurs. The tech bubble ended up bursting in early 2000, and 2008 produced one of the worst years for the stock market in decades as the economy plunged into recession amid the subprime mortgage crisis. 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.

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. These seven days have historically shown higher stock prices 79.2% of the time, reflected in the S&P 500. The Stock Trader’s Almanac compiled data during the 73 years from 1950 through 2022 and showed that a Santa Claus rally occurred 58 times (or roughly 80% of the time), with growth in the S&P 500 by 1.4%. However, a Santa Claus rally isn’t always an accurate predictor of gains the next year.

A Santa Claus rally has occurred 59 times since 1950, according to the Stock Trader’s Almanac. Some market commentators may casually refer to a Santa Claus rally at any point in December. Long-term investors, such as those saving for retirement, can generally ignore whether or not the stock market has a Santa Claus rally. Market performance over seven trading days is barely a blip over the course of an investing life, so trying to react to a potential rally is typically a mistake.