Learn all about the Santa Claus Rally to find out more and get the all-important answers!
With Christmas just around the corner, many people around the world are beginning to feel the festive cheer – whether it’s the joy of giving a gift or that special feeling you get at a Christmas Day family gathering. Indeed, some might say It’s the most wonderful time of the year!
But is it really that wonderful for traders? We’re going to try and answer this by taking a look at the ‘Santa Claus Rally’ phenomenon. You may have heard of it, but what does it actually mean for you? And how likely is it going to happen again this year? Keep reading to get the all-important answers!
Defining the Santa Claus Rally
A phenomenon going back many decades, the Santa Claus Rally was first mentioned in 1972 by trading expert Yale Hirsch in his Stock Trader’s Almanac published that year.
Basically, it refers to a trend where stock prices tend to rise during the final five days of a calendar year and the first two days of the next one. Despite only being a short window of seven days, historically this period has seen relatively consistent gains.
In fact, over the last 75 years, the S&P 500 has experienced an increase of more than 75% of the time during this period, with an average gain of around 1.3%. Quite a remarkable coincidence, you might say… or is it? Let’s delve a little deeper.
What Causes the Santa Claus Rally?
It’s not completely clear as to why this rally takes place and there’s no generally agreed explanation behind it. Having said that, there are a few influential factors to consider:
- Low trading volume
At the end of the year, many institutional investors and traders tend to go away on holiday or take a break from trading activities. This, in turn, shifts the market balance, with retail investors gaining prominence and potentially driving increased volatility due to their more bullish nature.
- Optimistic sentiment
The feel-good factor also plays a part, with spirits generally higher than normal over the festive period. This heightened optimism can lead to people feeling encouraged to either hold their positions or invest, with emotions and sentiment definitely having an effect on short-term market movements.
- Increased capital
Many people are rewarded with bonuses at the end of the year, with some even getting promotions or annual salary rises on top. The result of this is a larger pool of individuals with increased available funds to invest with, another potential factor that could lead to a spike in trading activity.
- Tax-loss harvesting
Towards the end of December, certain types of investors like to assess their portfolios from a tax perspective, choosing to sell underperforming assets at loss so that they can reduce their overall tax burden ahead of the year’s end. The possible side-effect of such a strategy is a boost in buying activity.
- Beating the ‘January Effect’
Investments surge in the last week of December ahead of the so-called ‘January Effect’, based on the idea of making early moves to capitalise on anticipated new year optimism. Getting ahead of the crowd is the ultimate goal for any investor, which is why this calendar effect can have a significant impact.
Will the Santa Claus Rally Happen in 2024?
It remains to be seen whether we’ll see the famous Santa Claus Rally again this year, but the consensus suggests we will. Of course, there’s no guarantee that previous market behaviour will lead to a similar performance this time around.
However, taking a wider view of the markets is important here because it helps us to make a better prediction. Capital inflows into US stocks have soared in recent months, particularly in the wake of Donald Trump’s conclusive presidential election victory in November.
Add into the mix the Federal Reserve’s (Fed) latest quarter-point rate cut in its final meeting of 2024, and there could be a potential recipe for another Santa Claus Rally in the S&P 500 Index.
Remember, it’s important to stay tuned in to the latest market developments so you don’t miss a beat, especially if you’re interested in trading during the Santa Claus Rally.
Alternatively, you can head over to our Market News section for more financial market updates and insight.
