All I Want for Christmas Is A Santa Claus Rally

By Tim Parker | December 18, 2012 AAA
All I Want for Christmas Is A Santa Claus Rally

Maybe the arctic ice is melting faster than we thought. That might explain why the Santa Claus rally in the world's financial markets hasn't happened yet this year. After all, without a frozen runway for takeoff, getting that sled into the air would not be an easy task.

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If you've been around the markets for a while, you have heard that Santa makes a stop on Wall Street at some point between Christmas and New Year's. You might scoff and call it folklore. And, you might be right. Critics say that the Santa Claus rally is really a combination of three things:

1. Institutional investors making one last effort to add an extra percent or two to their performance.

2. Moving holdings around to minimize tax burdens.

3. That general sense of holiday cheer that makes the money flow just as it does when we head out for some Christmas shopping.

Naysayers, however, will not be swayed. According to Marketwatch, while December has been one of the best months over the past decade, this has not been true during other periods. During the first part of the last century, for example, Santa found investors to be naughtier rather than nice, putting December near the middle of the pack. Historically, in fact, July has been the best performing months on average.

There are reasons, though, that investors are watching the skies for the sound of sleigh bells (and whatever other sounds flying reindeer make). Santa created some big expectations after last year.

"God Bless Us, Everyone"
What a sight it was to behold! Like a repentant Scrooge bestowing a plump Christmas turkey upon the Cratchits, one could not help but get the chilly bumps as the market rallied almost 9% from Nov. 25, 2011 to December 7. Investors were feeling all of the festive cheer that comes from seeing green (Not Christmas tree green, of course, the other stuff!), and believing the Santa Claus rally is for real was easy.

Then, just as the market took a downward turn and it looked like old "Bah humbug" was back, Santa returned. From December 19 through January 3, the market rallied another 6%! As 2011 ended, refrains of, "It's the Most Wonderful Time of the Year" filled Wall Street. Investors not only saw gains of 15% but also watched the rally continue into January.

"And Then He Did the Same Thing to the Other Whos' Houses, Leaving Crumbs Much too Small for the Other Whos' Mouses."
It is true. The year 2012 has not felt much like 2011. Instead of Santa, it feels like the Grinch has taken up trading this year and he's trading Apple! (Nasdaq:AAPL). From November 26 through December 7, thanks in part to Apple's nearly 10% drop; the market has seen only a 0.85% gain over the same period. No visions of sugarplums here.

There is, of course, that other thief of yuletide joy - the fiscal cliff. The cliff has continued to weigh on the minds of not only investors but just about everyone with a TV, newspaper or computer. Most investors would probably say that their letter to Santa included only one request this year, "Please solve the fiscal cliff."

Whether Santa will answer their wish, remains to be seen but you can't say this year hasn't been a good one. The S&P 500 is up nearly 11% for the year. Santa might even say that Wall Street is being a little greedy if it expects a frosty and festive investing season with big rallies on top of double-digit gains for the year.

The Bottom Line
Relax. It's not like Santa doesn't have time to deliver what investors want. Market watchers generally define a Santa Claus rally as taking place between Christmas and New Year's Day. Ultimately, most investors are like Ralphie in "A Christmas Story." They know the importance of staying patient, and never give up hope. And just as Ralphie knew that the Official Red Ryder Carbine-Action Two-Hundred-Shot Range Model Air Rifle would arrive; Wall Street believes its dream of a Santa Claus rally will surely come to pass. And, to all, a good night!

At the time of writing, Tim Parker did not own any shares in any company mentioned in this article.

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