Will a Holiday Bump Give Way to a Santa Claus Rally in the Stock Market?
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The Stock Market’s Santa Claus Rally
The stock market has been on a tear over the past year, and Wall Street experts predict a strong finish, including a “Santa Claus rally” that could extend this buoyancy into 2025.
The Origins of the Santa Claus Rally
The festive term, coined by trading expert Yale Hirsch in 1972, refers to a higher-than-usual rise in stock prices around Christmas. Most often, the period in question includes the final five trading days of a calendar year plus the first two days after New Year’s Day. (The dates themselves fluctuate depending on which days of the week the winter holidays fall on and when markets are closed to observe those holidays.)
The Historical Accuracy of the Santa Claus Rally
Historically, this stretch has outperformed other consecutive seven-day increments of trading days. Since 1950, the broad-based S&P 500 has had gains 78% of the time, with an average increase of 1.3% over the seven-day period, according to Dow Jones Market Data.
Converging Seasonal Factors
Experts say there are several converging seasonal factors that drive Santa Claus rallies. At the end of the year, institutional investors often recalibrate their allocations, sometimes with an eye towards year-end tax moves or to reset a portfolio that has become unbalanced. Since many Wall Street pros are on vacation during this stretch, trading volume is lighter than usual, magnifying the impact of those who are still buying and selling during that time. With institutional investors out of the pool, the activity of retail investors — who tend to be more optimistic — makes bigger waves.
Is the Santa Claus Rally a Harbinger of Good Things to Come?
Historical data has previously suggested that a Santa Claus rally is a harbinger of a good new year, but that hasn’t always borne out — especially recently. Take this year, for instance: Although 2023’s lack of a “Santa Claus rally” snapped a seven-year streak for the year-end phenomenon, the stock market outperformed in 2024, with the S&P rising by roughly 28% through the first week of December.
This is largely a story of moderating inflation, says Terry Sandven, chief equity strategist at U.S. Bank Wealth Management. “Inflation is kryptonite to valuations,” he says. “If you go back to a year ago, what you have today that you didn’t have a year ago is you have a Federal Reserve that’s in an interest rate-cutting mode.”
A Different Kind of Economy
Conversely, while the market eked out a Santa Claus rally at the end of 2021, 2022 was a rough year for stocks, with the S&P ending the year down roughly 18%. While holiday cheer is a perennial sentiment, market observers say that some of the traditional factors that contributed to the Christmastime boost observed by Hirsch don’t matter as much in today’s economy because so much about the global economy and the way stocks are traded has changed in recent decades.
Advice to Investors
To hear some market pros tell it, we’ve been in one all year long. “The Santa Claus rally has been in motion since January of this year,” Sandven says. “We’ve seen superb and broad-based strength across the indices and sectors,” he says, adding that he thinks the trend of stock gains will continue through the end of December.
Don’t Rely Solely on the Santa Claus Rally for Your Investment Decisions
Experts say you shouldn’t use the presence or absence of a Santa Claus rally as a guideline for investing. For one thing, the time frame is just too short: “With the Santa Claus rally being [seven days], that’s a pretty small slice, so it’s like a pollster making assumptions based on a very small sample size,” says Stovall. If you want to use seasonal patterns in your investing calculus, Stovall says to look to the month of January.
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