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Santa Claus Rally: Reality or Myth?
Around the holidays, financial bloggers and media pundits may mention what’s known as the Santa Claus rally.
The Santa Claus rally is a supposed bump in stocks after Christmas and before New Year’s. Is there truth to this rally? The answer is maybe.
Stock performance can be seasonal, and stocks have at times performed better during the holiday season than other times of the year. However, it is important for investors to proceed with just as much caution as any other time.
“While there is some evidence of higher returns during the holiday season, it is best not to read too much into this as results generally vary,” said Brian Bachelier, vice president of active trader strategy at Scottrade. “Just like trading at any other time of the year, trading during the holiday season should take into account your overall financial situation and your trading strategies.”
There are numerous reasons that market experts point to that may lead to a stock bounce during the holiday season:
- The holiday impact could be a small part of a larger seasonal trend that lasts from October to early January. There has been a tendency in the past for stocks to do well during those months.
- The holiday rally has become somewhat of a self-fulfilling prophecy.
- Tax-loss harvesting: At the end of the year, some investors sell off their poor-performing stocks and, from there, use that money to reinvest in the market. This may help drive up the price of certain stocks.
- Window dressing: This is when asset managers near the end of the quarter/year sell poorly performing securities while beefing up on ones that are performing well. This allows the fund to own stocks that look better to investors.
- Sentiment: Some people note that given the upbeat nature of the holiday season, more people are eager to invest in the markets.
Whether these factors contribute to a Santa Claus rally, whether the rally is a real phenomenon, or, if it is, whether it will continue, are debatable points.
“Some people believe that all of the elements making up the Santa Claus rally are well-known by all traders and investors, so it would be difficult, if not impossible, to time your trading accordingly,” Bachelier said. “But you don’t have to believe in the Santa Claus rally to believe in having an actionable trading and investing plan. You should follow that plan during all seasons.”
Question: Do you change your trading strategy around the holidays?
The content provided is for informational and/or educational purposes only and should not be considered a recommendation or an endorsement of any specific investment strategy. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. You are fully responsible for your investment decisions.
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