Many of us tend to take a few days off to travel and spend Christmas with our families. We take advantage of the low volume traded in the financial markets to unwind, recharge our batteries and take a break. Perhaps the luckiest ones will don those fabulous skis that Santa Claus has brought us (yes, I am on Team Santa Claus, although we’ll leave Santa Claus vs. the Three Wise Men for another post).
However, apart from toys, clothes, cologne or a trip, he also brings us financial wealth. Every year, investors look forward to what is known as the “Santa Claus Rally,” a seasonal phenomenon in stock markets that usually occurs in the waning days of December and the first days of January. But what exactly is this rally?
The term “Santa Claus Rally” was popularised by stock market analyst Yale Hirsch in the 1970s, in his famous “Stock Trader’s Almanac”. Hirsch observed that this pattern repeated itself frequently enough to be considered a significant seasonal trend.
The Santa Claus Rally can be attributed to several factors, both psychological and economic. These include end-of-year optimism, last-minute buying by fund managers to spruce up their portfolios (a phenomenon known as “window dressing”), and a lower trading volume during the holidays, which can heighten price movements. Additionally, investors tend to be more optimistic during the holidays, which translates into a greater risk appetite.
Historically, the S&P 500 has performed positively during this period. According to the data, since 1950, the index has recorded an average return of approximately 1.3% during the Santa Claus Rally 80% of the time, outperforming the average weekly return for the rest of the year, which for the past 30 years has stood at just under 0.2%.
Although the S&P 500 is the most studied in this context, other stock market indices, such as the Dow Jones Industrial Average and the Nasdaq Composite, have also shown similar trends. However, it is important to note that, although the rally has occurred quite regularly, it is by no means a guarantee and there have been years when it has not materialised, such as this one, in which the S&P 500 fell by -0.5%.
Despite its frequency, some critics argue that the Santa Claus Rally may be more of a myth than a solid reality. They claim that the underlying factors driving this phenomenon are inconsistent and that basing investment strategies on it could be risky.
For investors, the Santa Claus Rally can be an opportunity for quick profits, but it is also essential to be cautious. Those with a short-term view may consider taking advantage of this phenomenon, while long-term investors should remember that seasonal movements should not be the basis of a sound investment strategy.
I, for one, have always been fascinated by how year-end emotions and expectations can influence market behaviour. Although the Santa Claus Rally is not infallible, understanding this phenomenon gives us additional perspective for planning our investment strategies. As always, the key is to take a balanced approach and not get swept away by the enthusiasm of the moment.
Diari d’Andorra 15.01.2024