The Santa Claus Rally
Hopefully, you’re planning a really great Christmas this year, spending time with family, or perhaps even doing something you’ve always wanted to do, or even heading away for a short break somewhere.
Whatever your plans, we hope you’re not spending too much time looking at the financial pages of your chosen paper, or monitoring the markets.
Should you take a glance at them, however, then you might well see a story about the Santa Claus Rally.
It’s not often that markets and financial commentators feel frivolous (and trust us… we’ve tried to get them to smile!), but the Santa Claus Rally is that odd exception that seems to prove the rule. As we say, now is the time for family, rather than markets, but we wanted to share the story with you and show that even markets sometimes celebrate happy events!
Whilst by no means a sure thing, the Santa Claus Rally relates to a phenomenon which often sees markets rise during December, specifically in the last week of December, between Christmas and New Year. As we say, it’s not guaranteed and it certainly won’t affect every stock, share and fund, but there is a level of precedent for it.
Most ‘seasonal trends’ such as this tend to be anything but and in actual fact tend to happen sometimes and not others, but there are several pieces of research which indicate that the Santa Claus Rally exists. December is, for example, statistically the most profitable month of the year for the US S&P 500 index, where the Santa Claus Rally originated. Looking at data going back as far as 1930, the mean returns for December are 1.59%. July, April and January are relatively close (1.44%, 1.35% and 1.10% respectively), but the rest of the pack come far down the list. On a weekly basis too, the last week in December is statistically the best, with a charted 0.74% mean average return for the same market.
Fascinating! But why does this happen? Surely the market itself does not decide that Christmas has come early and everyone deserves a bonus?!
Actually, although there’s no definitive solid reason for the Santa Claus Rally, that doesn’t seem to be far from the truth! Christmas bonuses to traders in the US are paid before Christmas and typically invested straight away, so a new amount of money flows into the market. Seasonal ‘goodwill’ considerations are also cited, although far more likely is the fact that December often sees healthy buying and selling to adjust tax positions and alter the performance of funds for year end reports.
We would still like to think though, as we prepare to settle down for our own winter break, that it’s a little Christmas gift for all of us! Merry Christmas and let’s keep our fingers crossed that the Santa Claus Rally visits us again this year!