The Myth of the Santa’s Rally in the Market
It’s that time of year when we start hearing about the famous Santa Claus rally, where the market supposedly makes a final sprint to end the year on a high note. But does it really happen, or is it just a myth? Let’s look at some numbers.
In 1972, Yale Hirsch, which was the founder of the Stock Trader’s Almanac coined the term Santa Claus Rally to describe the final five trading days of the year and the first two of the following year.
If we analyze these 7 days as a period for the rally from 1950 to 2022, we find that the market experienced an average gain of 1.4% for the S&P 500 about 80% of the time.
However, it’s not always consistent. In 2022, the market rose only 0.8%, and in 2018 it saw a drop of -10.7%, marking a “bloody Christmas”. If we consider the last 20 years, there’s no concrete evidence that it’s highly likely to occur.
Some explanations for the rally include:
– End-of-year tax considerations.
– A sense of optimism as the year winds down.
– Wall Street holidays.
– Many people receiving year-end bonuses, injecting fresh funds into the market.
It’s also speculated that many institutional investors, those who move markets with their trading volumes, are on vacation during this period, leaving the market to retail investors, who tend to have a more bullish outlook.
The Santa Claus rally is a market anomaly, this is a market behavior that can’t be fully explained by traditional models.
Like any anomaly, its occurrence is random and difficult to predict. If it were a certainty, everyone would buy ahead of the event, but this isn’t something that happens often.
It’s also worth noting that the term was coined by an almanac that also introduced the “Presidential Election Year Cycle” and the “January Barometer.” The latter refers to market increases due to tax-related effects and portfolio rebalancing.
There’s no reason to adjust our strategy based on the Santa Claus rally. However, if it does happen and you were planning to exit the market to enjoy the year-end without exposure, it’s a good excuse to sell during green days and lock in your gains.
In conclusion, the Santa Claus rally exists to the same extent that Santa Claus does, more a belief than a reality. Still, it’s always fun to talk about it.
