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INVESTING EXPLAINED: What you need to know about a Santa Rally – an increase in the value of stock markets on the last five trading days of the old year and the first two sessions of the new
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In this series, we break down the jargon and explain a popular investment term or theme. Here’s the Santa Rally.
A get-together for Santa Claus?
I’m afraid no such event takes place, but a Santa Rally can also be an occasion of good cheer – which investors could celebrate by toasting the season and occasionally shouting Ho, Ho, Ho.
It is the name given to an increase in the value of stock markets on the last five trading days of the old year and the first two sessions of the new.
Festive cheer: A Santa rally is the name given to an appreciation of stock markets on the last five trading days of the old year and the first two sessions of the new
Who came up with this?
The late Yale Hirsch, an American investment guru, first used the phrase in 1972, after recording the performance of the S&P 500 index between 1950 and 1971.
This showed that stocks rose consistently in the run-up to Christmas and into the first days of January.
Hirsch viewed the rally as a bullish signal to buy stocks in the coming year. The Santa Rally is a more closely watched phenomenon in the US than in the UK, but this is changing.
Has this pattern been maintained?
A survey conducted by the Bestinvest platform in late 2021 found that over a 40-year period starting in 1982, markets rose about three-quarters of the time in December. This was a much bigger event than any other month.
Why?
Trading volume can be very low during the holiday season, meaning that an increase in the prices of a relatively small number of stocks can greatly flatter the overall picture. Some would argue that the mood of merriment and benevolence can lead to optimism about the prospects for the coming year.
I’ve heard about window dressing
Yes, at Fortnum & Mason. Less charmingly, fund managers seeking to provide the best picture of their funds in a final quarterly report may sell weaker stocks and pick up others that recover quickly. If widespread, this could boost a Santa Rally that is already underway.
What happened last Christmas?
The S&P 500 rebounded, which seemed to portend a great outcome for the year ahead. However, the index has plummeted 17 percent since January due to rising inflation and interest rates and geopolitical disruption.
A few weeks ago, US markets started to bounce back, driven by the idea that inflation was receding, and interest rate hikes may be more limited than expected. But the sentiment has quickly become more doom-laden.
What about the FTSE 100?
The Footsie stepped into Christmas 2021 with a Santa Rally. But there are some sharp declines due to higher tariffs and the war in Ukraine. However, the index is roughly at the January level.
Is Santa Claus coming to town in December?
The likelihood of a Yuletide bounce this year appears to be based on how traders decide to perceive upcoming economic data. One asset manager commented, “If there is less bad news than expected, traders may decide to get into the festive mood and rally.” Don’t open the crackers yet and don’t open the champagne yet.