Santa Claus Rally - February 01, 2022
To be more precise, stocks experience a greater price increase in the last five trading days of one year and the first two trading days after the New Year. This seasonal phenomenon has a name. It is known as Santa Claus Rally. It was first registered by Yale Hirsch in his Stock Trader’s Almanac in 1972. Such a short-term change in the behavior of the stock market is rather not important to long-term investors. However, it is still fun to learn about it.
We have examined the performance of the S&P 500 index over the past 50 years. We came across some interesting things. On average, the S&P 500 increased by 1.22% during the Santa Claus Rallies of the past 50 years. This means an average daily performance of 0.17%. For comparison, the S&P 500 recorded a 7.99% average annual performance in the same period of time, which means an average daily performance of 0.03%. In 38 of the 50 years examined (76% of cases), stock market prices increased during the 7 days in question. This is clearly above the average: if you take any 7 trading days over the past 50 years, stock prices rose in 57% of the cases. In 35 of the 50 years reviewed (70% of the cases), Santa Clause Rally recorded a stronger average daily performance than the previous year. You can see Chart 1 for more details.
What are the reasons behind it? Well, it’s simply the most wonderful time of the year! In addition, Investopedia says the following can explain Santa Claus Rally:
- tax considerations,
- an overall sense of optimism and happiness on Wall Street,
- the investing of holiday bonuses
- some very large institutional investors, a number of which are more sophisticated and pessimistic, tend to go on vacation at this time, leaving the market to retail investors, who tend to be more bullish
- people buying stocks in anticipation of the rise in stock prices during the month of January, otherwise known as the January effect
Moreover, according to Jeffrey Hirsch, editor of the Stock Trader’s Almanac, “The failure of stocks to rally during this time has tended to precede bear markets or times when stocks could be purchased at lower prices later in the year.” He also quoted a Yale Hirsch’s famous line: “If Santa Claus should fail to call, bears may come to Broad and Wall.” The latest Santa Claus Rally was a real gift to investors. The S&P 500 recorded the biggest gain in nine years potentially indicating a great 2022 for U.S. stocks.
Of course, a good stock market performance during the last Santa Claus Rally is no guarantee of a good 2022. We also do not want to persuade you to try to catch the wave next time Santa comes to town. Instead, we believe investors should pursue long-term goals and think in years and decades rather than in days. However, we would be happy to see the prediction of a great 2022 come true.
Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.