High year-end sales figures have a tendency to drive retailer stock prices up in anticipation of good quarterly returns. Both of these things are seen as having a domino effect on the rest of the market, leading to broad-based price increases. Interestingly, the Santa Claus rally is observed in stock markets around the world. For example, the Indian stock market exhibits a similar effect, where the last five trading days of December and the first two trading days of January tend to produce higher average returns than other days. A Santa Clause rally is observed if the stock markets gain in the last five trading days of the year, going into the first two trading days of the following year. Depending on when weekends fall in a particular calendar year, the start of a Santa Claus rally could be before or after Christmas Day.
However, there is no clear cause for the Santa Claus rally, and there’s no guarantee that it will continue. 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 https://bigbostrade.com/ to any rally that takes place around the end of the year. Still, investors should be aware of how the market moves at different times of the year. Although there’s no clear expectation for the Santa Claus rally, history has shown that stocks often outperform during the end-of-the-year period.
Santa Claus Rally watch: What to know this week
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However, market commentators will sometimes use the phrase to describe any rally that takes place around the end of December. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing video game stocks services. 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. Historically, during a Santa Claus Rally, the S&P 500 has risen an average of 1.3% but it doesn’t happen every year so it isn’t 100% predictable.
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- The term is sometimes used to refer to any rally that takes place around the end of the year.
- The S&P 500 on average drops 0.3% and returns only 4.1% for the new year 66.7% of the time, LPL said.
- Although there’s no clear expectation for the Santa Claus rally, history has shown that stocks often outperform during the end-of-the-year period.
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- Traders are commended to ignore the talk of a Santa Claus rally and instead stay focused on their own trading strategy and analysis.
This year, the S&P 500 officially dropped into a bear market the week beginning May 16. The phenomenon, given its label by analyst and creator of the Stock Trader’s Almanac Yale Hirsch, generally takes place during the last week of December into the first few days of January. Some years, the rally has taken place over an extended period, beginning Dec. 14 and lasting over two weeks.
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There are also theories that the Santa Clause rallies occur because institutional investors go on vacation over the holidays and aren’t actively trading during that time. This theory requires the assumption that retail investors tend to be more bullish and, when able to exert a larger impact on the market, will cause stock prices to rise. A ‘Santa Claus Rally’ is a term used to describe the phenomenon where the stock market jumps in value during the last week of December and into the first two trading days of the new year. There are a number of theories as to why this happens – from tax considerations to investors buying stocks with their holiday bonuses. 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.
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 outlook and not be tempted by the promise of Santa Claus rallies or the January Effect. The Santa Claus rally occurs when stocks rise over a seven-day trading period—starting the last five trading days of a year and continuing into the first two trading days of January in the following year.
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Meanwhile, technology — which is the largest sector in the S&P 500, is flat because some of the largest stocks (particularly Apple) have done well. Look past the largest names, and there is some selling, particularly in the more speculative tech stocks that Cathie Wood’s ARK Innovation ETF owns. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. Access and download collection of free Templates to help power your productivity and performance.
- If there’s a Santa Claus rally to end a year, the next year is expected to be good.
- Investment advisory services offered through Facet Wealth, Inc.(“Facet”), an investment adviser registered with the Securities and Exchange Commission (SEC).
- Since late 1928, the S&P 500 has been positive in that stretch 78.5% of the time, according to Bank of America.
- The S&P 500 was positive during those seven days in 15 of the 20 years — or 75% of the time, FactSet found.
- The risk/reward proposition (how much you’re likely to win on a winning day versus how much you could lose on a losing day) is also decidedly negative.
Over the last 20 years, the average winning day was just +1.85% against the average losing day of -3.28%, making the Santa Claus proposition even less attractive. Traders are commended to ignore the talk of a Santa Claus rally and instead stay focused on their own trading strategy and analysis. 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%. 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.
For example, according to data compiled by LPL Research and FactSet, the Santa Claus rally period in 1999 saw the S&P 500 drop 4% and the Dotcom bubble burst in 2000. Similarly, corresponding trading days in 2007 saw the S&P 500 drop 2.5%, and 2008 saw the Great Recession. As 2022’s final week of trading begins, traders and investors are likely excited about a potential Santa Claus Rally.
Understanding the Santa Claus Rally That Wasn’t
Morgan Private Client Advisor who will help develop a personalized investment strategy to meet your evolving needs. Asset allocation/diversification does not guarantee a profit or protect against loss. Like most theories, the Santa Claus rally is believed to be true by some, and merely a coincidence to others. If we dig into the historical performance of the S&P 500, we will see that a case can be made for either side, depending on what timeframes are analyzed.
While the Santa Claus Rally was originally defined as lasting just seven days, some analysts and commentators tend to use the term more broadly to refer to longer time periods or even the entire month of December. Using the week leading up to Dec. 24 over two decades, we find there is no tangible or reliable Santa Claus rally. Whether you count that time period or the week after Dec. 25 up to Jan. 2 of the new year, the returns are negligible, if slightly positive at +0.385%. 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.
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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. “If earnings don’t pan out, we could quickly test the 3550 level” in the S&P 500 index. You should always conduct your own research before making any investment or trading decision.
Burniske also says that a crypto bull cycle will require an increase in global market liquidity after it has contracted, which was likely the cause of the correction in the digital asset space. After no Santa Claus rally in 2018, the S&P 500 returned about 30% in 2019. Time is quickly running out for Santa Claus to arrive on Wall Street with a rally, but not everyone has given up hope yet, even though the market’s been uncertain and volatile up until the very end. The deciding factor will be just how disruptive it proves to be – both in our everyday lives and as far as companies are concerned. When it comes to Santa rally dates, however, it points out that the term is misunderstood.
The Santa Claus Rally makes for interesting news stories when the phenomenon occurs, but counting on it to usher in the New Year is by no means guaranteed. The bear narrative, of course, is that omicron will lead to more persistent inflation issues. Bulls have been keeping a close eye on one of the final data points for the week — Thursday’s release of the November Personal Consumption Expenditure (PCE) deflator, the Fed’s preferred tool for examining inflation. 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.
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