The stock market has been on a tear over the past 12 months, and Wall Street experts predict a robust finish, including a “Santa Claus rally” that might 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 frequently, the period in query includes the ultimate five trading days of a calendar 12 months plus the primary two days after Recent Yr’s Day. (The dates themselves fluctuate depending on which days of the week the winter holidays fall on and when markets are closed to look at 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 a median increase of 1.3% over the seven-day period, based on Dow Jones Market Data.
Experts say there are several converging seasonal aspects that drive Santa Claus rallies. At the tip of the 12 months, institutional investors often recalibrate their allocations, sometimes with a watch towards year-end tax moves or to reset a portfolio that has develop into unbalanced. Since many Wall Street pros are on vacation during this stretch, trading volume is lighter than usual, magnifying the impact of those that are still buying and selling during that point. With institutional investors out of the pool, the activity of retail investors — who are likely to be more optimistic — makes greater waves.
Some also speculate that a general sense of goodwill around this celebratory time of 12 months boosts sentiment, driving higher returns.
“Numerous people, when they give the impression of being on 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 very good recent 12 months, but that hasn’t at all times borne out — especially recently.
Take this 12 months, for example: 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 primary week of December. While the S&P is probably the most commonly used benchmark for determining a Santa Claus rally, the opposite major indices also had big gains in 2024: The Dow Jones Industrial Average has risen by roughly 19% to this point this 12 months, while the tech-heavy Nasdaq has gained nearly 34%.
This is essentially 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 happen to return to a 12 months ago, what you may have today that you simply didn’t have a 12 months ago is you may have a Federal Reserve that’s in an interest rate-cutting mode.”
Conversely, while the market eked out a Santa Claus rally at the tip of 2021, 2022 was a rough 12 months for stocks, with the S&P ending the 12 months down roughly 18%.
While holiday cheer is a perennial sentiment, market observers say that a few of the traditional aspects that contributed to the Christmastime boost observed by Hirsch don’t matter as much in today’s economy because a lot concerning the global economy and the best way stocks are traded has modified in recent a long time.
In Hirsch’s day, there was no algorithmic or high-frequency trading, dark pools or highly complex derivatives. The demographics of investors have modified markedly, as well.
“Numerous 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 unique dynamic available in the market,” he says, with retail investors and commission-free trading bringing a once-exclusive Wall Street to a Primary Street audience.
Will 2024 have a Santa Claus rally?
To listen to some market pros tell it, we’ve been in a single all 12 months long.
“The Santa Claus rally has been in motion since January of this 12 months,” 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 proceed through the tip of December.
But experts say you shouldn’t use the presence or absence of a Santa Claus rally as a tenet for investing. For one thing, the time-frame is just too short: “With the Santa Claus rally being [seven days], that’s a fairly small slice, so it’s like a pollster making assumptions based on a really small sample size,” Stovall says.
If you wish to use seasonal patterns in your investing calculus, Stovall says to look to the month of January. In a January that marks the primary 12 months of a presidential term, a positive return in January has been followed up by a positive full 12 months 91% of the time, he says.
And the calendar can only go to this point 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 helps drive equity prices higher,” Sandven says. “You’re seeing tech and related firms perform well because artificial intelligence is changing how we’re living, working and playing. And by most metrics, we’re within the early innings of that rollout.”
For investors, because of this firms’ performance is much more useful than the calendar.
“December has historically been a robust month, but we must always be investing based on what which means today versus what has happened in history,” Smith says. “Historical seasons do have a spot with regard to being aware of market dynamics; nonetheless, an important thing in market dynamics are fundamentals.”
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