Could We See A Santa Claus Rally?

At a Glance

  • A rally in the week after the Christmas holiday is common, but has only occurred in two of the previous four years.
  • The theories for what causes a Santa Claus rally go from trader optimism to year-end tax considerations

A Santa Claus rally describes a steady increase in the stock market that occurs in the last week of December through the first two trading days in January. There are numerous hypotheses for the causes of this phenomenon.  They include:

– Many investors tend to have a general feeling of optimism and happiness on Wall Street.

– The investing of holiday bonuses.

– Some very large institutional investors, many who might be more sophisticated and pessimistic, tend to go on vacation at this time, leaving the market to retail investors, who tend to be more bullish.

– Year-end tax considerations.

– Investors are trying to get in front of what is known as the “January Effect” which is a result of people buying stocks in anticipation of the rise in stock prices during the month of January.

Consumers Tell The Story

U.S. consumers have been spending, and have been one of the driving forces of the U.S. economy throughout 2019. In fact, Super Saturday, the last Saturday before Christmas, set a U.S. record for one-day consumer spending with shoppers shelling out $34.4 billion, according to Customer Growth Partners. Holiday retail sales give us a look ahead into the health of the consumer and usually are a leading indicator of what lies ahead.  Goldman Sachs retail analysts say the holiday season could be a disappointment for retailers because even though the consumer has been so strong, there have been signs of some weakness.  However, the National Retail Federation, unlike Goldman, is expecting strong results.

In addition to the aforementioned Thanksgiving/Black Friday/Cyber Monday results and retail sales, this year has an added wrinkle to it.  The ongoing trade war with China is the single most concerning issue facing the market, even more so than the Federal Reserve.  The market’s earnings per share estimates for 2020 have steadied after quite a drop in expectations for 2019, however the market continues to respond to news around trade between the U.S. and China.

Is Santa Real?

So is there any proof that there is indeed such an effect?  In 2017, Seeking Alpha quoted the “Stock Trader’s Almanac”, saying, “Since 1969, the Santa Claus rally has yielded positive returns in 34 of the past 45 holiday seasons…  The average cumulative return over these days is 1.4%, and returns are positive in each of the seven days of the rally, on average.”

However, the market has fallen in two of the previous four years. Moreover, if there is no rally, it can be a sign of a bear market in the future. According to Barron’s, In the final weeks of 1999 and 2007, stock prices rose rapidly but only to be followed by bear markets. The promise of Santa Claus rallies or January effects are not a sure thing, but it is an event worth watching as we close out the year.

Scott Bauer graduated with honors from the University of Illinois Business School, Urbana Champaign, in 1988 with a B.S. in Finance. Bauer began floor trading in 1991 and formed BOTTA Capital Management in 1995. Scott traded equity options, S&P options at CME and was employed by Goldman, Sachs & Co. as Vice-President, Equities Division. He is currently CEO of Prosper Trading Academy and appears regularly on CNBC, Bloomberg Financial and Fox Business as a guest commentator.

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