Christmas, and the other holidays that also fall near the end of the year, offer a time for family, gift-giving, time away from work and good cheer.
The stock market has been known to provide investors with a gift; historically right after Christmas. The trend has been aptly named the “Santa Claus Rally” and it just what the name implies.
In a year that has seen the market beaten up because of Fed interest rate hikes and historic inflation, some are not so sure the year-end trend will repeat.
There are other prognosticators who feel much more positive that the brief rally will repeat again this year.
In the past, the rally has caused stock prices, during the month of December, to be up slightly higher than other months on average. The real time period for the oft-repeating trend has traditionally been believed to occur during the last five trading days of December and the first two days of the new year. The short rally was first identified in 1972.
The more precise period, according to the Stock Traders Almanac, is the first trading session after Christmas to the second trading session after New Year’s Day. The Almanac says that the Dow has risen in 77 percent of the years since its creation in 1896 during this short period.
In years that showed dismal returns leading up to Christmas, the tendency of the rally seems to be stronger.
Going back to the very beginnings of the Dow, that percentage increase has been 2.2 percent. This is in contrast to the time period between Thanksgiving and Christmas, which has seen a below-average return compared to the other 11 months.
Looking for Gains in a Challenging Year
It may be more difficult to apply some historical trends towards 2022 since the economy has been hard hit with inflation at a 40-year high, the Federal Reserve has had to take aggressive action to stave off a deepening recession and many sectors of the economy have been hard-hit despite promising pre-Christmas sales numbers.
Despite all of this, many analysts anticipate another Santa Claus rally for 2022, going into 2023, with investors recouping a tiny portion of their losses.
There is often a lull or drop in the middle of December that proceeds the turn upwards at the end. Many experts attribute this to the need by fund managers to create some “window dressing” at the end of the year. They unload some poor performers from their portfolios. Tax loss selling by investors may explain the behavior of the market earlier in the month of December as well.
An interesting side note is that the average rise in stock prices has been greater in July than December by a slight margin.
For most equities’ investors, any rally is welcome and an opportunity to win back some losses. It may also help pay for some of this inflation-adjusted gift prices from Christmas, so the hope is that the trend holds through even an extra-challenging year.