By: Martha C. White and Editor: Julia Glum
The stock market has been on a tear over the past year, and Wall Street experts predict a strong finish, including a “Santa Claus rally” that could extend this buoyancy into 2025.
The festive term, coined by trading expert Yale Hirsch in 1972, refers to a higher-than-usual rise in stock prices around Christmas. Most often, the period in question includes the final five trading days of a calendar year plus the first two days after New Year’s Day. (The dates themselves fluctuate depending on which days of the week the winter holidays fall on and when markets are closed to observe those holidays.)
Historically, this stretch has outperformed other consecutive seven-day increments of trading days. Since 1950, the broad-based S&P 500 has had gains 78% of the time, with an average increase of 1.3% over the seven-day period, according to Dow Jones Market Data.
Experts say there are several converging seasonal factors that drive Santa Claus rallies. At the end of the year, institutional investors often recalibrate their allocations, sometimes with an eye towards year-end tax moves or to reset a portfolio that has become unbalanced. Since many Wall Street pros are on vacation during this stretch, trading volume is lighter than usual, magnifying the impact of those who are still buying and selling during that time. With institutional investors out of the pool, the activity of retail investors — who tend to be more optimistic — makes bigger waves.
Some also speculate that a general sense of goodwill around this celebratory time of year boosts sentiment, driving higher returns.
“A lot of people, when they look at the Santa Claus rally, it’s a confirmation of existing optimism,” says Sam Stovall, chief investment strategist at CFRA Research.
How accurate is the Santa Claus rally’s predictive effect?
Historical data has previously suggested that a Santa Claus rally is a harbinger of a good new year, but that hasn’t always borne out — especially recently.
Take this year, for instance: Although 2023’s lack of a “Santa Claus rally” snapped a seven-year streak for the year-end phenomenon, the stock market outperformed in 2024, with the S&P rising by roughly 28% through the first week of December. While the S&P is the most commonly used benchmark for determining a Santa Claus rally, the other major indices also had big gains in 2024: The Dow Jones Industrial Average has risen by roughly 19% so far this year, while the tech-heavy Nasdaq has gained nearly 34%.
This is largely a story of moderating inflation, says Terry Sandven, chief equity strategist at U.S. Bank Wealth Management.
“Inflation is kryptonite to valuations,” he says. “If you go back to a year ago, what you have today that you didn’t have a year ago is you have a Federal Reserve that’s in an interest rate-cutting mode.”
Conversely, while the market eked out a Santa Claus rally at the end of 2021, 2022 was a rough year for stocks, with the S&P ending the year down roughly 18%.
While holiday cheer is a perennial sentiment, market observers say that some of the traditional factors that contributed to the Christmastime boost observed by Hirsch don’t matter as much in today’s economy because so much about the global economy and the way stocks are traded has changed in recent decades.
In Hirsch’s day, there was no algorithmic or high-frequency trading, dark pools or highly complex derivatives. The demographics of investors have changed markedly, as well.
“A lot of this historical data is coming from an era where the market participants were very different,” says George Smith, portfolio strategist for LPL Financial. “The democratization of trading has allowed a different dynamic in the market,” he says, with retail investors and commission-free trading bringing a once-exclusive Wall Street to a Main Street audience.
Will 2024 have a Santa Claus rally?
To hear some market pros tell it, we’ve been in one all year long.
“The Santa Claus rally has been in motion since January of this year,” Sandven says. “We’ve seen superb and broad-based strength across the indices and sectors,” he says, adding that he thinks the trend of stock gains will continue through the end of December.
But experts say you shouldn’t use the presence or absence of a Santa Claus rally as a guideline for investing. For one thing, the time frame is just too short: “With the Santa Claus rally being [seven days], that’s a pretty small slice, so it’s like a pollster making assumptions based on a very small sample size,” Stovall says.
If you want to use seasonal patterns in your investing calculus, Stovall says to look to the month of January. In a January that marks the first year of a presidential term, a positive return in January has been followed up by a positive full year 91% of the time, he says.
And the calendar can only go so far in informing investment decisions. Past performance has never been a guarantee of future gains, and today’s economy has a tailwind with few historical parallels.
“Technology is helping drive equity prices higher,” Sandven says. “You’re seeing tech and related companies perform well because artificial intelligence is changing how we're living, working and playing. And by most metrics, we’re in the early innings of that rollout.”
For investors, this means that looking at companies’ performance is far more useful than looking at the calendar.
“December has historically been a strong month, but we should be investing based on what that means today versus what has happened in history,” Smith says. “Historical seasons do have a place with regard to being aware of market dynamics; however, the most important thing in market dynamics are fundamentals.”
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