The extraordinary history of the Santa Claus Rally: Morning Brief

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The extraordinary history of the Santa Claus Rally: Morning Brief

These two rallies were derived from similar circumstances, as the 2008 rally came at the end of the worst year for the S&P 500 since the Great Depression, and the 2018 rally came at the end of the worst year for the S&P since 2008. „That is meaningful,” Batnick said of the difference in returns and positivity rate. More active investors, however, may want to make their portfolios more aggressive to try to make the most forex scalping strategy of the rally and use the appearance (or lack thereof) of the rally as an indicator for how to invest in the year ahead. This combination — a strong consumer and economy, coupled with a Fed that is raising rates slowly and gradually — means the market should hold up in 2022. 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.

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  • As history has proven, anything can happen, and the best investment strategy is one that considers your whole financial situation for the long term.
  • First discovered by Yale Hirsch of „Stock Trader’s Almanac,” it has produced positive returns 34 of the past 45 years for an average return of 1.4%.
  • Plus, prospects for more near-term fiscal support via the Biden administration’s Build Back Better bill have dwindled, and inflation concerns spiked further.
  • The trend, known as the „Santa Claus rally,” encompasses the last five trading days of the calendar year and the first two of the new year.

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It’s not fully clear whether it’s purely psychological or there are some underlying financial reasons for the year-end rally, but history has shown that stocks tend to gain at the end of the year and into the first days of January. There are numerous explanations for the causes of a Santa Claus rally, including tax considerations, a general feeling of optimism and seasonal happiness on Wall Street, and the investing of holiday bonuses. Another theory is that investors are positioning themselves for the ‘January Effect’, a separate calendar-based phenomenon in which some stocks demonstrate a propensity to rise more than others during the post-holiday period in early January. The January Effect is believed to be the result of tax-loss selling in December to lock in losses, followed by repurchases in January, in compliance with the 30-day ‘wash-sale’ rules set by the IRS for taking capital losses.

The history of the Santa Claus rally

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 jump in stock prices, observed in the final five trading days of the year, typically starting a day after Christmas and going into the first few trading days of the New Year.

  • If Santa delivers a rally, the S&P 500 on average gains 1.3% in January and 10.9% for the new year 75.4% of the time, LPL said.
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  • 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.
  • Santa Claus rallies may or may not last through the remainder of January and on through the year.

First discovered by Yale Hirsch of „Stock Trader’s Almanac,” it has produced positive returns 34 of the past 45 years for an average return of 1.4%. Although data has shown that the Santa Claus rally period has generated more positive returns than negative returns, there is no way for traders/investors to predict whether it will happen again. It is important to note that past performance is not indicative of future results. Given such a small historical return, and a marginally positive frequency of occurrences, traders should be extremely cautious about buying or selling based on the supposed Santa Claus rally. While Santa Claus can be counted on to deliver the presents on Christmas, the stock market cannot be relied upon to always deliver gifts.

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To settle the charges, DBRS agreed to pay $8 million in civil penalties and KBRA agreed to pay $4 million in civil penalties, the SEC said. Credit rating agencies DBRS Inc. and Kroll Bond Rating Agency, LLC also agreed to pay civil penalties to settle SEC Senior Mobile Developer Job Description charges related to the record-keeping failures, the regulator added. Nevertheless, it can still be fun to look back at history and see what kinds of patterns and averages emerge. After no Santa Claus rally in 2018, the S&P 500 returned about 30% in 2019.

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This makes sense if you think about it, as many market participants will take care of year-end position adjustments in the week before Christmas, while there is still plenty of liquidity. Further, this lull is most likely due to momentum trading strategy market participants taking the holiday break between Christmas and New Year’s. As such, for the purposes of this article, we will assign the week leading up to Dec. 25 as having the greatest potential for a „Santa Claus rally.”

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Detrick also observed that a positive move during this period often came with strong returns over the month of January. There are also competing patterns coming in 2023, which is the third year of the presidential cycle with the mid-term election year, the weakest of the cycle historically, in the past. Since 1950, the third year of a presidential cycle has averaged a return of 16.8% versus 6.0% for year two, LPL Financial said. Additionally, the first quarter of year three of the presidential cycle also has been the strongest of the four quarters that year, it said. If Santa delivers a rally, the S&P 500 on average gains 1.3% in January and 10.9% for the new year 75.4% of the time, LPL said. This marks December out as having the highest average returns of any month, followed by November and January.

What is the Santa Claus rally?

If history is a guide, stock investors may be poised to get a gift over the holidays. Historically, the Santa Claus Rally has occurred 76% of the time between 1950 to 2019. According to the 2019 Stock Trader’s Almanac, the market has risen an average of 1.3% each year during that period. Traders should be wary of market talk surrounding the notion of a Santa Claus rally, and stay fixed on the current market environment. While we can expect Santa Claus to deliver presents on time, we can’t expect him to always deliver reliable stock-market gains. The ultimate hope is that the markets remain choppy in the next few days but rallies going into the close of the year.

Conversely, the market has fallen in four of the following years of the six times stocks have declined during this stretch. Hirsch’s theory came from his research of the Standard and Poor’s 500 (S&P 500) performance between 1950 and 1971 over the seven-day period stated above. Moreover, the market has been positive in 34 of the last 45 years, just over 75%. All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions.

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For example, in 2018, the S&P 500 fell through much of the fourth quarter as Treasury yields rose. After Hirsch wrote about the pattern, it seemed to become part of the investing lexicon by the early 2000s when a number of references were made to the term in the financial media. In this examination of the Santa Claus rally, we’ll discuss the origins of the rally, why it happens, and the history behind it.

That said, any positive gain in the stock market around Christmas is virtually guaranteed to lead financial market observers to refer to the Santa Claus rally. According to The Stock Trader’s Almanac, the S&P 500 has gained an average of 1.3% since 1950 during the Santa Claus Rally periods. More recently, since the inception of the SPDR S&P 500 ETF Trust (SPY) in 1993, the Santa Claus Rally has produced gains 18 out of 27 times, or about 67% of the time. According to Gordon Scott, a member of the Investopedia Financial Review Board, since 1993 all other six-day periods produced positive SPY returns 58% of the time. One is that stocks rally in the week between Christmas and New Year’s, and that carries into the second day of trading in the New Year, usually Jan 2. The other time-span definition—and our preferred one—is the week leading up to Dec. 24.

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