Santa Claus Rally. New Year gifts for traders

Christmas is approaching, and with it the theme of the so-called “Santa Claus Rally” becomes relevant. In this article, you will learn:

What is Santa Claus Rally?

Yale Hirsch was among the first to document the Santa Rally. In 1972, in The Stock Trader’s Almanac, he analyzed data from 1950 to 1971 and noted that the S&P 500 was up 1.5% on average over the seven-day pre-Christmas period. This is how the term “Santa Claus Rally” appeared among traders. What is it? The Santa Rally is a particular example of seasonal fluctuations in financial markets. Traditionally, for the end of December and the beginning of January, stocks grow in price. To be more precise, it is generally accepted that the Santa Rally falls on the last 5 trading days of the outgoing year and the first 2 trading days of the New Year. According to Investopedia in this period in recent years:

• the dynamics of the S&P 500 has been positive in 15 out of 20 years;
• the S&P 500 averaged 0.7% growth.

A similar trend can be found in data analysis since 1950: the S&P 500 has risen 1.3% on average and has been positive 79% of the time. It’s definitely more than the average return index.

LPL Research and FactSet (in the chart above) show that the S&P-500 stock index tends to rise in the second half of December. At the same time, growth is especially pronounced if the previous November was marked by a decrease in the index. Overall, December tends to be one of the strongest months of the year for the US stock market. Since 1926, only July and April have outperformed the December index, about 1.9% and 1.7% versus 1.6%, respectively. According to Bloomberg, Santa Rally is also showing up in the foreign exchange market. For example, you can notice it when analyzing the average change in the EURUSD exchange rate for each month.

5 Possible Reasons for the Santa Rally

It is impossible to name the exact reason for the start of the Santa Rally. Experts identify several growth drivers. It is possible that each of the drivers contributes to the stock market’s overall growth to a different degree. The most likely reasons for the Santa Claus Rally are:

Conclusions

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