Complete explanation about the Santa Claus rally
What is the Santa Claus rally?
The Santa Claus rally is a well-known seasonal change in the American stock market. Markets tend to be bustling during the last 5 business days of December and the first 2 business days of the new year.
This idea was first proposed in 1972 by Yale Hirsch, founder of “Stock Trader's Almanac = Stock Investor's Yearbook.”
If you look at the data from 1950 to 2022,”Stock Trader's AlmanacAccording to”, the S&P 500 index (average stock price index) rose 58 times out of 73 times during this period. In other words, there is a probability that this has increased about 80%. On average, the S&P 500 Index increased 1.3% during the Santa Claus Rally. Furthermore, the Santa Claus rally is sometimes used as a leading indicator of what will happen in the new year.
Hirsch believes that three indicators can be used to evaluate stock market performance for the following year: the Santa Claus rally, the performance of the first five business days of the new year, and the January barometer (which assesses market performance in January).
So if all three of these are good, he thinks it's pretty likely that the stock market will be doing well next year.
What causes Santa Claus rallies?
Opinions are divided in the market as to why the Santa Claus rally happens. There's no one explanation everyone can agree on. However,CFIAccording to the summary of the description by, the most commonly cited reasons are as follows.
Institutional investors will disappear
Institutional investors and traders who work there usually take a vacation during the last week of December. Markets are more likely to be dominated by retail investors during that time. Retail investors tend to be bullish, which can boost profits.
Record losses in taxes
Wanting to record losses on taxes is one of the potential causes of the Santa Claus rally. In the United States of America, tax is applied to gains from price increases (capital gains) in the stock market, but losses from price drops can be used as deductions in investors' tax returns.
As a result, many investors sell underperforming investments at the end of the year to offset taxable profits — known as the “tax saving method by recording losses.” Since the deadline that can be treated as a loss is December 31, investors predict that stock sales will decrease on the last day of December, and stock buying activity will flourish. This may be one of the reasons that led to the Santa Claus rally.
Special factors in January
Investors' January special factors may also contribute to the Santa Claus rally.
The special factors of January refer to the trend where the stock market often rises in January every year. This also means that investors dare to sell stocks that have unrealized losses in December because they will lose money under tax law. Instead, it is a phenomenon that occurs when a new stock is purchased again in January.
There is a possibility that the stock market will rebound in January for this reason.
holiday atmosphere
The festive atmosphere of Christmas and New Year can create a positive mood for investments. This positive sentiment gives investors hope and optimism for the new year. This could be an opportunity to invest in the stock market.
Additional funding
During Christmas, people often receive a variety of gifts, including year-end bonuses. These additional funds will provide investors with more money than usual. They may choose to invest in the stock market as a result.
Trends in recent years
According to “Almanac Trader” and “Wall Street Journal,” the American stock market has experienced a Santa Claus rally for the past 7 years.
From 2016 to 2022, the S&P 500 recorded profits of 0.4%, 1.1%, 1.3%, 0.3%, 1.0%, 1.4%, and 0.8%, respectively, during the Santa Claus period.
Even if the American stock market experienced a bear market in 2022, the Santa Claus rally occurred as expected.
Historical data shows that Santa Claus rallies tend to bring more positive returns than negative ones. That said, it's not possible to accurately predict future rallies.
Past facts do not guarantee future results.
The following table compares the performance of the S&P 500 index during the Santa Claus Rally over the past 7 years with the corresponding performance for the year as a whole:
Is the 2023 Santa Claus Rally coming?
As the year draws to a close, investors look forward to the Santa Claus rally in the near future.
In November, stocks recorded memorable monthly profits, and the S&P 500 rose more than 8%. This optimistic surge has made many investors imagine that the Santa Claus rally is coming again.
However, Real Investment Advice fund managers point out that there is a possibility that a correction in stock market conditions will occur prior to the Santa Claus rally.
This is mainly because mutual funds are required to distribute annual capital gains (gains on price increases), dividends, and interest income. These distributions will begin in late November, but a significant number will run during the first two weeks of December.
Nevertheless, the manager believes that lower stock prices during the first two weeks of December may increase the chances of a Santa Claus rally.
Certainly, no one can guarantee the consistent occurrence of Santa Claus rallies. Whether it will happen or not is a matter of probability.
Past patterns can help predict future trends. However, there are various factors that influence each year. Therefore, it's important to think that the results are unpredictable.
Therefore, investors and traders who want to participate in the Santa Claus rally should create personal trading plans and develop risk management strategies such as preparing position sizes in advance and thoroughly cutting losses.
Lastly
The Santa Claus rally refers to the last 5 business days of December and the first 2 business days of the following year. During that time, the US stock market usually experiences a rise in stock prices.
Common reasons for Santa Claus rallies include the absence of institutional investors, year-end tax measures, special factors in January, additional investment funds, etc.
Over the past 7 years, Trader Almanac has consistently reported that Santa Claus rallies have occurred in the US stock market.
There is no guarantee that there will be a Santa Claus rally. If investors and traders want to participate in rallies, they should develop effective trading plans and risk management strategies.
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