We start hearing a lot about a Santa Claus rally every year on December 1st, but when exactly is it suppose to take place? The stock market prices do tend to rise in the month of December historically, it is a bullish month the majority of the time. Since 1950, no other month has posted a higher average return than December. Over the last 100 years, the Dow has averaged a gain of 1.55% in December, with gains 74% of the time.
In contrast the Santa Rally is generally seen only over the final week of trading in the last 5 days of December and the first two days of January in the New Year. It is a type of seasonal calendar effect. The Santa Rally concept was first recorded by Yale Hirsch in his Stock Traders Almanac in 1972.
There is no generally accepted theory and explanation for the timing of this bullish phenomenon. The rally is sometimes attributed to increased investor buying in anticipation of a bullish January. Another possibility is an injection of additional capital into the stock market for tax reasons that must be completed by the end of the year like putting money into a tax differed IRA or 401K. Other possible reasons for the Santa rally may be due to fund managers “window dressing” their holdings by adding money to winning stocks and sectors for reporting purposes. The end of the year also tends to be very low volume and illiquid as bigger institutional investors and professional traders take the rest of the year off after Christmas and New Year on vacation leaving smaller retail investors to be able to move the market to the upside as so few of them can sell in volume to push the market down.
According to the Stock Traders Almanac, “Since 1969, the Santa Claus rally has yielded positive returns in 34 of the past 45 holiday seasons – the last five trading days of the year and the first two trading days after New Year’s. The average cumulative return over these days is 1.4%, and returns are positive in each of the seven days of the rally, on average.”
The failure of the Santa Claus rally to occur is very bearish and typically indicates a poor economic outlook for the coming year; a lack of the rally has often signaled a preview of a flat or bearish market trend in the New Year.