Should you believe in the Santa rally?


As the holiday season looms large and Black Friday and Cyber Monday have already fired the starting gun for retail sales, is the legend of the Santa rally something investors should be pinning their hopes on?

As with many things involved with the word Santa, many think that a seasonal stock rally is a myth. However, mid-term elections, Presidential campaigns and even more mundane events, such as quarterly reports, all have undoubted impacts on Wall Street, so does Santa Claus have a similar effect?

Increased activity

The December run-up to the holiday season is an obvious time to see retails sales peak as consumers dig deep to make purchases. Therefore, it would make sense that certain stocks get a boost even before sales figures are available as a metric for how well the companies performed.

Historical data does suggest that there is more to it than that, as from 1987 through to 2016, December has been the best month for the S&P 500 by quite a margin. Over that almost three-decade period, the index reported 24 advances and only six declines in December. The average monthly return, excluding dividends, was 1.85%, and as the average return for all months is 0.62%, that’s a significant statistical difference.

As a side note, over the same almost 20-year period, Canadian stocks have performed even better during the month of December, but perhaps that due to it being closer to Santa’s base in the North Pole.

Why the boost?

December’s above-average performance seems to be a real phenomenon, but it’s too broad to be totally due to a retail sales bounce. One factor that could come into play is that corporate end-of-year bonuses are paid out then, and some of those funds inevitably get ploughed back into stocks and results in rising stock prices.

Another element that could play is a part is so-called tax-loss selling whereby in October and November investors dump the worst-performing stocks in their portfolios so that they can write off their losses for tax purposes. The size of this sell-off can set up conditions conducive to a market rebound in December.

Of course, as with many other aspects of the market, the power of the self-fulfilling prophecy can never be fully discounted. If investors expect the market to rise at any given point, they will try and buy in just before this happens, and when more people buy stocks, the market then rises.

Is the Santa rally real?

According to the Stock Trader’s Almanac 2017: “Since 1969, the Santa Claus rally has yielded positive returns in 34 of the past 45 holiday seasons – the last five trading days of the year and the first two trading days after New Year’s. The average cumulative return over these days is 1.4%, and returns are positive in each of the seven days of the rally, on average.”

As the data the Almanac uses is based on both cyclical and seasonal tendencies and trends, its conclusions would appear to carry some weight. However, a DIY aspect may also factor into whether the rally is real. Professional traders and market movers and shakers use cyclical trend data to make change-of-position decisions. Smaller DIY investors usually don’t have the experience to manage risk in this way and are more likely to use instinct to buy and sell at particular times.

Personal opinion

Since it was first mentioned in 1972 by Yale Hirsch in the Stock Trader’s Almanac, opinions about the Santa rally (sometimes also known as the December effect) have been divided. Most professionals would say that having a long-term investment strategy is the only way to be successful in the markets, but the rise of popularity in day trading and leveraged derivatives, such as a contract for difference (CFD) trade, shows that many investors are taking a different view.

As the signs point to the historic bull market finally running out of steam on Wall Street, perhaps this year Santa will bring a little joy to everyone in the markets prior to whatever 2019 may bring.

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