Have you ever wondered what happens to the stock market during the holiday season? Is it all doom and gloom as investors cash out for Christmas shopping, or is there something more festive happening on Wall Street? Let’s unwrap the truth about stock market performance around Christmas time.
The Santa Claus Rally: Not Just a Holiday Myth
Contrary to what some might think, stocks don’t typically go down around Christmas In fact, there’s actually a well-documented phenomenon called the “Santa Claus Rally” that brings joy to investors during the holiday season
The term “Santa Claus Rally” was coined back in 1972 by Yale Hirsch, founder of the Stock Trader’s Almanac. This rally specifically refers to the stock market’s performance during a very particular seven-day trading period
- The last five trading days of December
- The first two trading days of January
And here’s the good news for investors: since 1950, during this seven-day window, the S&P 500 has gained an average of 1.3% and been positive a whopping 79% of the time! That’s certainly not coal in your stocking.
Jeffrey A. Hirsch, the son of Yale and current editor of the Stock Trader’s Almanac, has noted that “despite all of the high frequency trading and algorithmic trading and the velocity of the market these days…patterns [like the Santa Claus rally] continue to persist.”
Historical Performance: The Numbers Don’t Lie
When we look at historical data, the evidence for the Santa Claus Rally is pretty compelling:
- The S&P 500 has averaged a 1.3% gain during the Santa Claus Rally period since 1950
- When considering data back to 1928, the average gain is even stronger at 1.6%
- The rally has delivered positive returns approximately 79% of the time
Looking at recent history, the 2023 Santa Claus rally period saw:
- S&P 500: gained approximately 1.58%
- Dow Jones: up by 0.82%
- Nasdaq Composite Index: rallied 1.94%
So instead of a Christmas crash investors often receive a nice little present from the market!
But Why Does This Rally Happen?
You might be wondering what causes stocks to rise during this period. There are several theories that try to explain this seasonal pattern:
1. Holiday Spirit and Optimism
The general festive mood and optimism surrounding the holidays might spill over into trading behavior. When people feel good, they’re more likely to buy stocks.
2. Institutional Investors on Vacation
Many professional and institutional traders take time off during the holidays. This leaves the market more in the hands of retail investors, who tend to be more optimistic and bullish than their professional counterparts.
3. Year-End Bonuses and Tax Considerations
People often receive holiday bonuses in December, and some of this money finds its way into the stock market. Additionally, there are tax-related considerations that can influence buying and selling decisions at year-end.
4. Increased Consumer Spending
The holiday shopping season generates strong revenue for many companies, which can boost investor confidence in the economy and lead to more stock purchases.
When Santa Skips Wall Street
However, it’s important to note that the rally doesn’t occur every year. When Santa doesn’t deliver (meaning stocks decline during this period), it can sometimes be a warning sign for the market.
The Stock Trader’s Almanac has observed that when the Santa Claus Rally doesn’t materialize, it can precede significant market downturns. For example:
- In 1999, a 4.0% decline during the Santa Claus Rally period was followed by the Dow dropping 37.8% over the next 33 months
- 2007’s disappointing holiday performance preceded the 2008 financial crisis
As the old Wall Street saying goes: “If Santa Claus should fail to call, bears may come to Broad and Wall.”
The January Connection
Interestingly, the Santa Claus Rally isn’t just isolated to the holiday period. It’s actually part of what Yale Hirsch called the “January Trifecta,” which includes:
- The Santa Claus Rally (last 5 trading days of December + first 2 of January)
- The market’s performance in the first five trading days of January
- The “January Barometer” (suggests January’s market performance sets the tone for the year)
According to Hirsch’s research, when all three indicators are positive, the market has ended the year higher about 90% of the time since 1950, with an average gain of almost 18%. That’s a pretty impressive track record!
December: Generally a Good Month for Stocks
While the Santa Claus Rally specifically focuses on those seven trading days around the New Year, December as a whole has historically been a strong month for stocks. The broader month shows gains about three-quarters of the time.
So if you’ve been worried about a Christmas crash, the historical data should provide some comfort. December is typically one of the stronger months for the stock market, not a time of decline.
Should You Trade the Santa Claus Rally?
Now for the million-dollar question: should you adjust your investment strategy to take advantage of the Santa Claus Rally?
For most investors, especially those with long-term goals like retirement, the Santa Claus Rally should be more of a statistical curiosity than a reason to significantly alter your investment approach. Since 1969, this seven-day period has delivered an average 1.3% gain in the S&P 500, but like any market pattern, there are no guarantees.
If you’re a buy-and-hold investor or someone saving for retirement in a 401(k) plan, you probably shouldn’t make major changes to your strategy just for this brief period.
However, if you’re a more active trader, you might consider the historical strength of this period when making your year-end decisions. Just remember that past performance doesn’t guarantee future results!
The Bottom Line: Ho-Ho-Hold Those Stocks!
So, do stocks go down around Christmas? The evidence suggests quite the opposite! The Santa Claus Rally represents one of Wall Street’s most enduring seasonal patterns, with stocks typically rising during the holiday period rather than falling.
While nothing in the market is guaranteed, historical data shows this period has been reliably positive since 1950. Instead of selling off before Christmas, investors might want to consider hanging onto their stocks to potentially benefit from this seasonal trend.
Just remember that like Santa himself, the rally doesn’t visit every year. And when it doesn’t appear, it might be warning of tougher times ahead.
As with any investment decision, it’s important to consider the Santa Claus Rally within the context of your broader investment goals and risk tolerance. The holiday season might bring gifts to investors, but it’s still just one small part of the year in the market.
Do you have any experiences with the Santa Claus Rally? Have you noticed this pattern in your own investments? We’d love to hear your thoughts in the comments below!
FAQ
Do stocks go down in Christmas?
Tax-loss harvesting: Investors sell poorly performing stocks in December to realize tax losses that can offset gains elsewhere in their portfolios. The selling depresses stock prices, which then recover in January as the selling pressure eases, thus creating an uptick in prices.
What month do stocks go down the most?
For years, people in the financial world have noticed something “off” about the stock market’s behavior in September. Often referred to as the “September Effect,” this is when the stock market tends to perform worse in September compared to any other month of the year.
Is it a good idea to buy stocks in December?
That would seem to imply that it would be better to invest in December (before prices go up) than in January. If you’re a short-term trader, that could be true. But there’s no way to know which stocks might lead that charge next month, so using a short-term strategy is risky.
Do stocks go up or down before a holiday?
In the world of investing, the “holiday effect,” as it is often referred to, is a phenomenon where stock prices see an increase right before a major holiday.