Santa Claus Rally

What Is a Santa Claus Rally?

A Santa Claus rally describes a sustained increase 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 the causes of a Santa Claus rally including tax considerations, a general feeling of optimism and happiness on Wall Street, and the investing of holiday bonuses. Another theory is that some very large institutional investors, a number of which are more sophisticated and pessimistic, tend to go on vacation at this time, leaving the market to retail investors, who tend to be more bullish.

Key Takeaways

  • The Santa Claus rally refers to the tendency for the stock market to rally over the last weeks of December into the new year.
  • This period includes the last few trading days of the year, which share a similar characteristic with Black Friday and Christmas Eve.
  • Theories for its existence include increased holiday shopping, optimism fueled by the holiday spirit, and institutional investors settling their books before going on vacation.
  • Regardless of the reason, more than two-thirds of Decembers dating back to the 1960s have resulted in positive gains for shareholders.
  • Still, as with many market anomalies, it may just be random, and there is no guarantee it will continue into the future.

Understanding the Santa Claus Rally

A Santa Claus rally is a seasonal phenomenon, according to The Stock Trader’s Almanac, a longtime provider of analysis of both cyclical and seasonal market tendencies. According to the 2016 edition of the Almanac, "since 1969, the Santa Claus rally has yielded positive returns in 34 of the past 45 holiday seasons—the last five trading days of the year and the first two trading days after New Year's. The average cumulative return over these days is 1.4%, and returns are positive in each of the seven days of the rally, on average."

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 is some research that points to value stocks outperforming growth stocks in December. Of note, many stock pickers in actively managed mutual funds tend to invest in value stocks.

Evidence for the Santa Claus Rally

The last few days of December do tend to log gains more often than losses. In fact, since the inception of SPY in 1993, the Santa Claus rally has produced gains about 67% of the time. Going further back, the Santa Claus Rally has occurred more than 70% of the time between 1950 to 2020. Below, the chart for 2008-2009 shows how the Santa Claus rally can typically play out.

Chart showing 2008-2009 Santa Claus rally
Chart showing 2008-2009 Santa Claus rally.

But not all years have produced a Santa Claus rally. The chart below depicts the worst-performing turn of the year in the past three decades, that of 2007-2008.

Chart showing 2007-2008 Santa Claus rally
Chart showing 2007-2008 Santa Claus rally.

Some have argued that the Santa Claus rally is just an example of a broader end-of-month effect, whereby stocks are bid up in the last few days of every trading month. However, December seems to produce a greater effect than the other months:

Average Returns of the Santa Claus rally
Average Returns of the Santa Claus rally.

Financial columnists and traders like to opine on the likelihood of a Santa Claus rally. Some cite economic and technical analysis, and others offer pure conjecture.

Trading the Santa Claus Rally

Traders pay attention to cyclical trends and, at times, find ways to exploit historical patterns such as the Santa Claus rally. 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 go against them. These speculators also use technical patterns in particular indexes and carefully determine their planned entry and exit points. Observing the Santa Claus rally is one thing, but actually trying to profitably trade the phenomenon is another. A useful set of rules for doing so includes considering a stop-loss level and having a plan for what to do if the trade is neither profitable nor stopped out at the end of the six days. The flowchart below may be used as a heuristic for capturing gains from a Santa Claus rally.

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 401(k) plans, for example, the Santa Claus rally does little to either help or hurt them over the long term. It is an interesting news headline happening on the periphery but not a reason to become either more bullish or bearish. A better strategy is to maintain a long-term investment strategy and not be tempted by the promise of Santa Claus rallies or January effect.

Flow chart of trading rules for the Santa Claus rally
Flow chart of trading rules for the Santa Claus rally.

What Causes a Santa Claus Rally?

Several theories try to explain the Santa Claus rally, including 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.

Is the Santa Claus Rally Real?

The term Santa Claus rally was coined in the early 1970s by a stock market analyst who noticed a pattern of higher market returns between the first trading session after Dec. 25 and the first two trading sessions of the new year. Though past results can never guarantee future performance, the data seems to support that rallies during these time periods happen more often than not.

Since 1950, the S&P 500 has gained an average of 1.3% during Santa Claus rally periods, according to The Stock Trader's Almanac. Since the launch of the SPDR S&P 500 ETF Trust (SPY) in 1993, the Santa Claus rally has produced gains 18 out of 27 times, or about two-thirds (67%) of the time. According to Gordon Scott, a member of the Investopedia Financial Review Board, all other six-day periods since 1993 have produced positive SPY returns 58% of the time.

Will There Be a Santa Claus Rally This Year?

The Santa Claus rally happens during the last five trading days of the year and the first two trading sessions of the new year. Though historical statistics show that higher market returns tend to occur more often than not during these periods, a Santa Claus rally does not always occur, and there is no way to predict if or when that will happen again.

The Bottom Line

Historically, stock prices have outperformed during the last several days of the trading year following Christmas - which has given it the name "the Santa Claus rally." While it does not occur every year, this pattern of returns has seemed to hold up historically, making it an unusual market anomaly that has not (yet) fully disappeared. Whether it will persist into the future, only time will tell. Yet, with investors in the holiday spirit and optimistic about the new year, market psychology may keep this rally going for years to come.

Article Sources
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  1. Stock Traders' Almanac. "Stock Traders' Almanac."

  2. CME Group. "The History of the Santa Claus Rally."

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