It's completely natural to look for patterns in the market, especially when we're all in the holiday spirit and hoping for a strong finish to the year. We all want to feel optimistic about our portfolios, and the idea that the market gives us a predictable gift at the end of December is a comforting thought.
Where the Santa Claus rally theory began
Market analyst Yale Hirsch first introduced this concept back in 1972 in his book, "The Stock Trader's Almanac." He famously coined the phrase, "If Santa Claus should fail to call, bears may come to Broad and Wall."
Hirsch wasn't just guessing. He spent decades analyzing market trends to find insights for the average investor. He is actually the same analyst who brought us other statistically predictable seasonal concepts like the "Presidential Election Year Cycle," the "January Barometer," and the "Best Six Consecutive Months."
Hirsch specifically looked at the Standard and Poor's 500 (S&P 500) performance between 1950 and 1971. He discovered that during the final week of December and the first two days of the new year, the index went up an average of 1.5%. Since he published those findings, that trend has largely continued, with the broad market index rising 1.3% on average during that window.
Why the market might jump during the holidays
To be clear, there is no single, proven cause for the Santa Claus rally. However, market watchers have a few theories about why we see this activity during these seven trading days.
Some believe it's simply the holiday spirit. People are generally more upbeat this time of year and often view the year ahead with more optimism. There is also the factor of extra money, as investors may inject their holiday bonuses back into the market.
Another theory suggests that sophisticated institutional investors are typically out of the office for the holidays. This leaves a lower-volume market run by bullish retail investors who can drive up prices.
Others believe forward-looking investors buy stocks in anticipation of the "January Effect." This capital sometimes comes from a derivative of tax-loss selling season, which is when institutional and retail investors sell failing holdings in December to reduce their capital gains.
Looking at the historical numbers
Like many market theories, you can find data to support both sides depending on where you look. According to historical S&P 500 data tracked by The Stock Trader's Almanac, the market has been positive in 34 of the last 45 years during this period, which is just over 75% of the time.
For those who believe in the rally, past volatile years offer compelling examples. Conversely, recent years show that a short-term rally does not guarantee a strong year ahead.
| Year | Santa Claus Rally Performance | Subsequent Market Activity |
|---|---|---|
| 2008 | Up 7.5% | Followed by a 23% surge in early 2009 |
| 2018 | Positive rally | Preceded a 29% broad index return in early 2019 |
| 2021 | Up 1.4% | Market topped January 3rd, followed by a bear market in June |
(Note: Past performance of market indexes is not a guarantee of future results.)
According to research from Michael Batnick at Ritholtz Wealth Management via CNBC, the index has risen annually by 1.3% on average over the last 71 years.
More recently, according to historical S&P 500 market data since 1994, stocks have been positive 23 times during this stretch. The subsequent year yielded positive returns 18 times. Conversely, in the six times stocks declined during this holiday period, the market fell in four of the following years.
How the rally behaves in volatile markets
No one knows for sure if a rally will happen in any given year. When we look at periods of high volatility, expectations should probably be tempered. For example, during the steep market declines of 2022, the S&P 500's total return sat just under -15%. While the Fed fights hard to bring inflation down to its 2% target, it can take months for those effects to be truly felt in the economy.
(Please note: This represents Facet's current views and opinions and is subject to change. It is not a guarantee of future results or market performance.)
The Facet difference
The media loves to turn seasonal upticks into compelling stories, but your financial health shouldn't rely on whether Santa visits Wall Street. At Facet, we believe your money roadmap should be built on your life, your values, and your specific goals, not on calendar anomalies.
Our flat-fee membership gives you access to a CFP® professional who helps you navigate uncertain markets with confidence. We focus on the things we can control, like tax efficiency and risk management, so you can enjoy your holidays without worrying about daily market moves.
