The tree is trimmed, and the stockings are hung by the chimney with care. Children and investors are both waiting to see what Santa has in store for them this holiday season. The term Santa Claus Rally dates back to 1972 when the term first appeared in the Stock Trader’s Almanac, but what is this phenomenon and how might it affect you?
Seasonal Patterns
The week of Christmas may be one of the more notable times to keep your eye on the market, however it is not the only time you may see the market trend either up or down. Performance of NYSE Composite, Nasdaq 100, and S&P 500 indices all report some of the strongest performance over the past 20 years in April, July, and November. On the other hand, January, February, June, and September rank as some of the worst times for performance. December fails to be mentioned despite the common occurrence of a late December rally. While the market often experiences a lift near Christmas, the Santa Clause rally does not always mean that the market will end with a positive return for the year.
What Drives Santa’s Sleigh
It is not a team of reindeer pulling the market upwards the week of Christmas, but there are factors that contribute to the pop in the market that can occur in December. Holiday spending can be a major driver. Strong Black Friday and Cyber Monday sales can give companies an end of the year revenue increase resulting in increased stock price. Some investors may feel encouraged by what the new year will bring while others may just be feeling extra jolly with holiday cheer. Money changes hands quickly as people receive bonuses or gifts of money. Some investors are looking to do last minute tax planning and ranging from tax loss/gain harvesting and tax-deductible contributions. All of this can drive money into the market contributing to the Santa Claus Rally.
While consumers may be moving more money around, professional traders and other financial professionals may take time off resulting in low trading volume. When less people are selling stocks and bonds, and more people are buying and spending, the market tends to respond positively.
When Santa Leaves Coal
While there is not a reliable way to predict what is in store for the market, a Santa Claus rally can be a positive sign for the coming year. While there have only been six times that the Santa Clause rally did not come since the mid 1900’s, in those scenarios, January was lower 5 of those 6 times. A lack of a Santa Claus rally can be viewed as a bad omen to those who study the market.
A Word on Market Timing
Since we spent some time talking about seasonal trends, it is important to remind investors that market timing only accounts for a small portion of returns. Instead of timing the market, investing for the long term, buying at low prices, and selling at high prices coupled with proper diversification and managing risk can result in better longer term returns than trying to time the market. A trusted advisor can guide your strategy to make sure that your investment strategy is appropriate for you. Not sure where to turn? Our team of advisors can help tailor a portfolio to meet your individual planning needs.
Advisors Management Group, Inc. is a registered investment adviser whose principal office is located in Wisconsin. Opinions expressed are those of AMG and are subject to change, not guaranteed, and should not be considered recommendations to buy or sell any security. Past performance is no guarantee of future returns, and investing involves multiple risks, including, but not limited to, the risk of permanent losses. Please do not send orders via e-mail as they are not binding and cannot be acted upon. Please be advised it remains the responsibility of our clients to inform AMG of any changes in their investment objectives and/or financial situation. This commentary is limited to the dissemination of general information pertaining to AMG’s investment advisory/management services. Any subsequent, direct communication by AMG with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available for your review upon request.
