The Santa Claus Rally: Implications for Investors Ahead of Presidential Election Year
The Santa Claus rally refers to a period of sustained stock market growth that typically takes place around the Christmas holiday on Dec. 25, with estimates suggesting that the rally occurs in the week leading up to Christmas or from Christmas Day through Jan. 2. The rally has been attributed to various theories such as end-of-year tax considerations, a general feeling of optimism and seasonal happiness among investors, and investment of holiday bonuses. During this period, some institutional investors settle their books and take vacations, resulting in bullishness in the market due to increased participation from retail investors.
Especially in presidential election years, Investors often do not have to worry about stock market performance in December.
Sure, the first couple of weeks can be rocky owing to tax loss selling and if November was especially strong but, as a rule, December usually comes through and gives investors an up arrow," said Jeffrey Hirsch of the Stock Trader's Almanac.
What Historical Data Tell
Decembers that precede a presidential election usually yield significantly higher stock market returns:
Average December returns during pre-election years since 1950:
$Dow Jones Industrial Average(.DJI.US$ : third best of year, +2.7%
$S&P 500 Index(.SPX.US$: third best, +2.9%
$NASDAQ 100 Index(.NDX.US$: second best, +4.2%
$Russell 2000 Index(.RUT.US$: second best, +3.0%
But even in years that don't precede a presidential election, stocks usually see year-end gains.
In 1972, Yale Hirsch, the founder of the Stock Trader's Almanac, named the period between the final five trading days of the year and the first two trading days of the following year the "Santa Claus Rally." During this period, stock prices have historically shown an increase around 79.2% of the time in the $S&P 500 Index(.SPX.US$. Data from the Stock Trader's Almanac indicates that a Santa Claus rally occurred 57 times during the 70-year period from 1950 to 2020, with the S&P 500 growing by 1.3%.
However, like many market anomalies, the Santa Claus rally may be random with no future guarantees.
Source: Investopedia, CNBC, Stock Trader's Almanac
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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