Do you believe in Santa Claus (Rallies)?
Ho-Ho-Ho-Hold on to those investments. If you’re invested in stocks, you may have a present coming your way! That’s right. A (short) stock market rally could be on the horizon. We’re talking, of course, about the “Santa Claus Rally!”
Ho-Ho-Ho-Hold on to those investments. If you’re invested in stocks, you may have a present coming your way! That’s right. A (short) stock market rally could be on the horizon. We’re talking, of course, about the “Santa Claus Rally!”
What is it?
A Santa Claus Rally is the informal name given to the stock market’s tendency to gain value between Christmas and New Year’s. More specifically, it describes what often happens over the last five trading days of the year and the first two trading days of the following year. While long-term investors focused on building wealth tend not to obsess over what happens over any given week in the stock market, this phenomenon can be a fun example for new investors to learn how the stock market works and some of the forces that move it. There are plenty of exceptions to the Santa Claus Rally and there is no guarantee that it will occur this year (or in the future).
How is a Santa Claus Rally different from other market rallies, and why does it occur?
Though some argue that identifying a clear cause of this end-of-year market boost is akin to finding Santa himself, there are a handful of educated explanations. The festive period sees investors getting their hands on year-end bonuses and holiday gifts. This extra money, in turn, helps fuel trading activity. Essentially, these reasons are more behavioral in nature unlike typical rallies that are often based on economic data (think about those post-Christmas splurges as opposed to your reaction to changes in interest rate policy).
Investors also tend to buy stocks in anticipation of the “January Effect,” resulting from money being reinvested into the market after tax-loss harvesting in December – *cue thunderous applause*. So while you’re snuggled up by the fire with your eggnog, why not use this as an opportunity to start building wealth?
See what the numbers have to say*.
*Santa Claus Rally Date Ranges: 2017=12/22/2017-1/3/2018, 2018=12/24/2018-1/3/2019, 2019=12/24/2019-1/3/2020, 2020=12/24/2020-1/5/2021, 2021=12/27/2021-1/4/2022
Don’t get distracted by short-term performance
In a sense, the Santa Claus Rally becomes a self-fulfilling prophecy. If you believe in it, you invest accordingly! Another Wall Street adage on the calendar to keep an eye out for… “As goes January, so goes the year.” In other words, if the market is up in January, that could be a good sign for the rest of the year! Yale Hirsch of the Stock Trader’s Almanac was the first to discuss both of these phenomena. Just remember: past performance and fun sayings don’t dictate what will happen with your investments. Do your research first, never invest money without understanding all associated risks, and keep in mind that time in the market could be the best gift you can give yourself this holiday.
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