What is a 'Santa Claus Rally'

A Santa Claus rally is a move higher in the stock market that occurs in the last week of December through the first two trading days in January.

There are numerous explanations for what causes a Santa Claus rally, including tax considerations, happiness around Wall Street and people investing their holiday bonuses. Another is that some very large institutional investors, a number of which are more sophisticated and pessimistic, tend to go on vacation this week, leaving the market to retail investors, who tend to be more bullish.

Of note, many financial columnists usually write stories about why they believe a Santa Claus rally will or won’t happen every December, mostly citing economic and technical analysis or, in some cases, conjecture.

BREAKING DOWN 'Santa Claus Rally'

A Santa Claus rally is indeed a seasonal phenomenon, according to The Stock Trader’s Almanac, a longtime provider of  analysis of both cyclical and seasonal market tendencies.

Looking at data from 1950 to 2017, the Stock Trader's Almanac found that the S&P 500 Index advanced in 49 Decembers and declined 17 times, with an average gain of 1.6%, the best for any month.

The scorecard for the Dow Jones Industrial Average (DJIA) looked similar: up 46 times, down 20 times, and an average gain also of 1.6%.

Many consider the Santa Claus rally to be a result of people buying stocks in anticipation of the rise in stock prices during the month of January, otherwise known as the January effect.

Also, there’s some research that points to value stocks outperforming growth stocks in December. Of note, many stockpickers in actively managed mutual funds tend to invest in value stocks.

Pros and Cons of a Santa Claus Rally

Chartered market technicians pay attention to cyclical trends and, at times, find ways to exploit historical patterns such as Santa Claus rallies. They tend to do so repeatedly over time, and by limiting both the amount of risk and reward they take on via position sizing, stop orders and cutting losses short if positions tend to go against them. They also use technical patterns in particular indexes and carefully determine their planned entry and exit points.

None of this is useful for most investors, who do not have the trading experience to manage risk in such short time frames. For buy-and-hold investors and those saving for retirement in 401k plans, for example, the Santa Claus rally does little to either help or hurt them over the long term. It’s an interesting news headline happening on the periphery, but not a reason to become either more bullish or bearish.

  1. Contingency Clause

    A contract provision that requires a specific event or action ...
  2. Release Clause

    A release clause is a mortgage term that refers to a provision ...
  3. Severability

    A severability clause states that the terms of a contract are ...
  4. Financial Responsibility Clause

    A financial responsibility clause indicates that an auto insurance ...
  5. De-Escalation Clause

    A de-escalation clause is an article in a contract that calls ...
  6. Military Clause

    A clause found in most residential leases that permits military ...
Related Articles
  1. Personal Finance

    Santa's Salary: The Highest Paid Holiday Help

    If you're looking for work around the holidays, there are definite perks to working in the red suit. Learn about Santa's high personal appearance fees.
  2. Insurance

    Life Insurance Clauses Determine Your Coverage

    Understanding these key parts of your policy will help you to ensure that your family will be covered.
  3. Investing

    10 Stocks That Outperform in December

    Holiday cheer: these 10 Dow stocks have a 30-year history of posting strong gains in December.
  4. Investing

    50% Chance of Stock Selloff May Kill Santa Claus Rally

    Byron Wien says "overbought" conditions could lead to a 10% correction
  5. Investing

    Selling Coke Across the Pond is Different (KO)

    Coca-Cola put a twist on an ad in Britain. It was not well received.
  6. Investing

    Amazon Cloud Service Drops Controversial Clause

    AWS got rid of a controversial clause that prevented customers from suing over patent infringement.
  7. Investing

    PTTRX: PIMCO Total Return Fund Performance Case Study

    Discover the performance trends of the PIMCO Total Return Fund, and learn which times of year the fund has performed better and worse than usual.
  8. Insights

    Trump Sued Over Foreign Emoluments

    The federal lawsuit alleges that Trump is at risk of violating a clause in the constitution.
  9. Investing

    Stocks Could Rise As Much As 27% In 2018

    Golden Bull: The S&P 500 May Rise Sharply If Tax Reforms Are Passed
  10. Trading

    These Stocks Are Strong January Performers (EQC, FAX)

    January isn't typically a great month for stocks, but these five tend to outperform.
  1. What is a "force majeure"?

    A force majeure is derived from the French term meaning "greater force" and refers to any natural and unavoidable catastrophe. ... Read Answer >>
  2. How is the consumer price index (CPI) used in market escalation contracts?

    Understand the purpose of market escalation contracts and learn how the consumer price index (CPI) is often used to make ... Read Answer >>
  3. Is a waiver of subrogation clause better for a tenant or a landlord?

    Find out why a waiver of subrogation clause is important to include in a lease agreement, and understand how it affects landlords ... Read Answer >>
  4. Why do people say that September is the worst month for investing?

    One of the historical realities of the stock market is that it typically has performed poorest during the month of September. Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center