A seven-trading day period starting Dec. 24, 2008, and ending Jan. 5, 2009, saw the S&P 500 gain 7.36%. This rally brought some respite to the index that had, until then in the year, dropped more than 40%. For reference, the chart below compares the results of trading in any random six-day period in the past 26 years with the results of trading two kinds of six-day groupings. The first is the turn-of-month effect, four sessions at the end of a month and two sessions into the next month.

  • If Santa’s a no-show, the S&P 500 historically underperforms in January and over the following year.
  • There’s also the argument that holiday shopping can bolster businesses’ bottom lines and help boost stock prices.
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  • “I believe January will test the market, as earnings dominate and the Fed meets (to determine interest rates) Jan 31-Feb 1,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

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.

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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. According to our analysis cited above, the average positive gain over the last two decades is +1.85%, while the average loss was -3.28%. As traders LexaTrade Review return from the holiday-shortened week, the price action heading into the new year will be closely monitored — especially given the relatively light economic data and earnings calendar for the coming days. “When it comes to the UK stock market, this success rate is even more pronounced, with December delivering positive returns 83% of the time,” he said.

According to The Stock Trader’s Almanac, the S&P 500 rallied 7.4% in the six-day period between 2008 and almost double the gains of the next strongest rally. In the past two decades, the S&P 500 Index — 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. 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. Like the jolly bearded man it is named after, no one knows the definitive reason why a Santa Claus Rally arrives in December and often gifts investors with positive returns through the holidays.

  • The historical statistics we looked at above suggest slightly better than odds that a stock rally will take place around Christmastime.
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  • According to The Stock Trader’s Almanac, the S&P 500 rallied 7.4% in the six-day period between 2008 and almost double the gains of the next strongest rally.
  • 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.
  • December tends to be among the strongest months of the year for U.S. stock performance.

Just because the Santa Claus rally does usually happen, and it often predicts the market the following year, that doesn’t mean it will continue to do so. If investors anticipate it, they are likely to behave differently, and market participants may adjust according to the expectation of a Santa Claus rally. Like other calendar effects, including the January effect and phrases such as, “Sell in May and go away,” there is strong evidence that the Santa Claus rally is real and can predict the market’s outcome.

Bureau of Labor Statistics issues its latest monthly consumer price index report. Whatever the reason for the Santa Claus rally, investors can use a bit of good news. “When you think of a Santa Claus rally, it’s all about anticipating or looking forward,” said Terry DuFrene, global investment specialist at J.P.

What Is A Santa Claus Rally?

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). By definition, the Santa Claus rally refers to gains in the market that typically happen in the last five days in one year and the first two days of the next. The term is sometimes used to refer to any rally that takes place around the end of the 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.

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Some believe that the rally is caused by the temporary bullish optimism of investors relaxing with family or from retail investors investing their holiday bonuses. There are also more general calendar trends called the ‘holiday effect’ or the ‘long-weekend effect’ where the stock market is theorized to perform better than average before holiday periods. This could be because lighter trading volumes during these periods make it easier for bullish investors to move the market. A Santa Claus rally is a market theory describing when the stock market surges during the final week of December, extending into the following two trading days of the new year. There are a number of theories as to why this happens—from tax considerations to investors investing holiday bonuses to institutional investors taking a respite. But the jury is still out on whether this and other seasonal hypotheses hold water.

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To the extent it exists, 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 the month of December overall. Of note, many stock pickers in actively managed mutual funds tend to invest in value stocks.

The Santa Claus Rally

A rebound across the major indexes on Thursday brought back what has turned out to be false hope for the late, short-lived rally, which some use as an indicator of what’s to come in the new year. The best Santa Claus rally definition is that stock markets post positive results in the immediate run-up to Christmas and the very start of the new year. Whatever the case, it’s wise not to count on seasonal phenomena as a tried and true investing method. As history has proven, anything can happen, and the best investment strategy is one that considers your whole financial situation for the long term. The media tends to jump at the chance to turn any seasonal market uptick into a compelling story, and the Santa Claus rally is no exception.

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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. 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.

Observing the Santa Claus rally is one thing, but actually trying to profitably trade the so-called phenomenon is another matter. Financial columnists and traders like to opine on the likelihood virtual portfolio of a Santa Claus rally. Some cite economic and technical analysis, and others offer pure conjecture. By providing your information, you agree to our Terms of Use and our Privacy Policy.

Again, looking at the historical performance of the S&P 500 over the last two decades, we conclude that it is nearly a toss-up between a tangible rally and a normal trading week. 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 Stress Test 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.

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. 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. However, there is no clear cause for the Santa Claus rally, and there’s no guarantee that it will continue. 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.