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.
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Average returns by month, historical, Dow Jones Industrial Average. Data: Thomson Reuters
What is the Santa Claus Rally?
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 rallies in December roughly 3 out of every 4 years.
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1.57%
5.64%
5.78%
0.41%
0.76%
-5.90%
5.08%
3.25%
1.26%
1.48%
5.99%
0.86%
-0.10%
-0.76%
-0.33%
-1.87%
-9.18%
2.31%
0.70%
1.76%
1.08%
2.86%
3.71%
1.57%
1.65%
December returns by year, S&P 500, 1998-2023, Data: MarketSurge
What causes the Rally?
It’s difficult to pinpoint an exact cause, but a few theories include:
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.
Window Dressing
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.
Year-End Bonuses
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.
Tax Purposes
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.
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.
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
Self-
Fulfilling Prophecy
Ho-ho-hoping for bigger returns this year?
MarketSurge can help you take advantage of a potential Santa Claus Rally! Subscribe today to get the most powerful stock research platform for individual investors.
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0.1%
1.2%
1.5%
0.2%
0.2%
0.0%
-0.1%
-0.4%
1.0%
1.1%
1.3%
How does investor psychology factor into it?
-6.03%
the market doesn’t always rally during this time, so it should not be thought of as a “sure thing.”
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