What is a Santa Claus rally

The end of the year is often positive for the U.S. stock market.

This phenomenon is called “Santa Claus rally”. The fairytale period falls on the last 5 trading days before the New Year and 2 days after the holidays.

Statistics

According to Stock Trader’s Almanac, since 1950, the S&P 500 has averaged a 1.3% performance over the period. At that, in more than 70% of cases the index was growing.

According to the results of Schroders analysis of three decades of data, the dynamics of the S&P 500 during the Santa Claus rally is more moderate (about 1%), but still positive. Notably, the UK market (FTSE 225 index) showed the strongest trends during the Santa Claus rally over the period.

What’s the reason for the Santa Claus rally

First, it may be a matter of “window dressing”: mutual funds buy leaders for more attractive reporting.

It should be noted that in order to receive tax deductions, investors sell the year’s outsiders. Thus, the total outcome depends on the size of individual issuers. This year, the growth leaders were Moderna, Ford, and NVIDIA shares. In the outsiders – PayPal, Twitter, Walt Disney.

The following explanations are also highlighted: elevated mood on Wall Street, investment of Christmas bonuses, expectation of the “January effect” (growth of shares in January). Especially the rally in the stock market during the year may contribute to this.

Bonus. Over the past 15 years, October and December have been the best months for the S&P 500 Index year-to-date, with average gains of 6.9% and 3.7%.