Santa Clause Stock Market Rally and Window Dressing

Talking heads and brokers love to spout off about the Santa Claus rally at the end of each year. The Santa Claus rally is a term used to describe a phenomenon in which stock prices tend to rise in the last five days of the year, as well as the first two trading days of the new year. It was first defined in ‘The 1972 Stock Trader’s Almanac’ by Yale Hirsch. It is believed that this phenomenon is caused by investors trying to realize capital gains before the end of the year and by the window dressing effect of portfolio managers.

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Window dressing has been shown to have an impact on stock markets. Traders can move markets much easier in lower-than-average trading volume during the holiday season. Many portfolio managers are motivated to present a portfolio for bonuses that is heavily weighted with stocks that have performed well over the year. To do this, they will purchase stocks that have performed well in the last few months of the year, which can push up the price of those stocks. This can contribute to the Santa Claus rally.

The success of the Santa Claus rally over the years has been mixed.

On average the S&P 500, the Dow and the Nasdaq Composite have risen during the Santa period about 80% of the time. The Dow’s average gain has been 1.4%; the S&P’s 1.3%. The Nasdaq Composite has risen 1.8% on average during the last five trading days of December and the first two trading days of January.

However, there have been years where the rally has not materialized, leading to losses. Since December 1999, the S&P 500 fell during the Santa period five times. Each time, the following January finished lower. Three times, the S&P finished lower for the year: 2000, 2008 and 2015.

According to Ryan Detrick, LPL Financial Chief Market Strategist: “Going back to the mid-1900s, there have been only six times Santa failed to show in December. January was lower five of those six times, and the full year had a solid gain only once.”

At the end of 2021 the Dow Jones Industrial Average and the S&P 500 indices had their best Santa rally in a long time according to Dow Jones Market Data. The Dow ended 36799.65, a new record close and up 2.4% from Dec. 23, marking the index’s best Santa rally since the period ending in January 2009. The S&P 500 rose 1.4% from Dec. 23, its best Santa rally since January 2013. The Nasdaq Composite, however, fell 0.2%. All three indexes rose in the previous five Santa periods.

Source: Stock Trader’s Almanac, TC

From The TradersCommunity Research Desk