The Santa Claus Rally is a recent topic of discussion among traders. This season has been one of the most bullish times of the year for more than a century, providing gains around 70% of the time. What is the Santa Rally and during what days does it occur?
The Santa Claus Rally, also known as the "December Effect," is a phenomenon in the stock market where stocks tend to experience a boost in the final week of December and the first two trading days of January. This rally is named after the jolly old man in red who brings gifts to children on Christmas Eve, as the stock market often receives a "gift" in the form of increased activity and positive performance during this time.
The chart below displays the performance of the S&P500 for over two weeks, starting at the beginning of the year's final week up to the end of the first week of the new year. Since 2010, 10 times out of 12 the market has offered positive returns during this period.
There are a few theories as to why the Santa Claus Rally occurs. One theory is that investors tend to have a more positive outlook during the holiday season, leading to an increase in buying activity. Another theory is that mutual fund managers and other large investors often use the end of the year to rebalance their portfolios, which can lead to an influx of buying activity. Additionally, the influx of year-end bonuses and holiday spending cash may also contribute to increased buying activity in the stock market.
Regardless of the reasons for the rally, the fact remains that the stock market tends to experience a boost during the final week of December and the first two trading days of January. This boost can be a welcome sight for investors who have experienced a tumultuous year in the stock market. In fact, the Santa Claus Rally has historically been a reliable predictor of future market performance. Usually, when the Santa Claus Rally is positive, the stock market is likely to have a positive year. On the other hand, if the rally is negative or fails to materialize, it may be a sign of a bear market in the coming year.
Is the Santa Claus Rally a sure thing?
Despite its historical reliability, the Santa Claus Rally is not without its sceptics. Some critics argue that the phenomenon is simply a statistical anomaly and that there is no underlying reason for the boost in stock market performance. Others point out that the stock market has become increasingly
unpredictable in recent years, making it difficult to rely on historical patterns like the Santa Claus Rally.
This year’s performance has had nothing of usual. Geopolitical tensions, global tightening challenges, and energy scarcity have weighed enormously on investors’ risk appetite. And although the selling intensity of the previous few days has decreased, this doesn't mean buyers are rushing in; the majority of market participants are sitting on the sidelines, having given up hope in a year-end rally and anticipating worsening liquidity conditions in the final sessions of 2022.
Conclusion
the Santa Claus Rally is a phenomenon in the stock market where stocks tend to experience a boost in the final week of December and the first two trading days of January. The reasons for this rally are not completely understood, but it is likely due to a combination of positive investor sentiment, portfolio rebalancing, and increased spending during the holiday season. While the Santa Claus Rally is not without its sceptics, investors still keep a close eye on the stock market during this period as it can still provide valuable insight into the overall health of the stock market and serve as a useful predictor of future performance.
