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presents
Yes, there really is a Santa Claus Rally! It’s a phenomenon where the stock market makes bigger-than-usual gains at the end of December and the beginning of January. In fact, December has been the second-best month for the Dow Jones Industrial Average going back over 50 years. If you’re not paying attention to the market during the holidays, you’re leaving money on the table.
1.5%
1.3%
1.2%
1.1%
1.0%
0.9%
0.2%
0.2%
0.1%
0.0%
Jan.
Feb.
Mar.
Apr.
May
Jun.
Jul.
Aug.
Sep.
Oct.
Nov.
Dec.
-0.1%
-0.4%
Average returns by month, historical, Dow Jones Industrial Average. Data: Thomson Reuters
What is the Santa Claus Rally?
The market rallies in December roughly 3 out of every 4 years.
5.99%
5.78%
5.64%
5.08%
4.42%
3.71%
3.25%
2.86%
2.31%
1.76%
1.65%
1.57%
1.48%
1.26%
1.08%
0.76%
0.86%
0.70%
0.41%
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
'17
'18
'19
'20
'21
'22
'23
-0.10%
-0.33%
-0.76%
-1.87%
-5.90%
-6.03%
-9.18%
December returns by year, S&P 500, 1998-2023, Data: MarketSurge
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The Santa Claus Rally, as the term is commonly used, usually refers to the time between Christmas and New Year’s Day. However, historical research says that the most profitable range of days is the last five trading days of December and the first two trading days of January.
Keep in mind:
the market doesn’t always rally during this time, so it should not be thought of as a “sure thing.”
What causes the Rally?
It’s difficult to pinpoint an exact cause, but a few theories include:
Window Dressing
Institutional investors (like big banks, hedge funds, mutual funds and pensions) often make big stock buys before the end of the year to “bulk up” their portfolios with stocks that performed well, which gives a boost to leading stocks.
Year-End Bonuses
Individual investors, who tend to be more bullish as a group than institutional investors, will often have year-end bonuses to spend and some time off to spend it. This often results in more buying, which drives stock prices higher.
Tax Purposes
To take advantage of tax code loopholes, some investors will sell stocks they’ve taken a loss on at the end of December and buy them back in January. This creates an artificial stock price bump in January, and investors anticipating this may drive up prices at the end of the year.
How does investor psychology factor into it?
The market is rational, but you can’t say the same for people. Here are a few ways that investor sentiment could alter the market in late December.
Self-
Fulfilling Prophecy
People believe in the Santa Claus Rally, so they expect the market to rise. People buy more stocks and, as a result, the market rises.
Holiday Cheer
There’s cheer in the air around the holidays! This can manifest itself in an optimistic outlook that leads to more buying and higher stock prices.
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