Santa Claus Rally: Myth or Market Magic?
Santa Claus Rally: Myth or Market Magic?
By:Kai Zeng
We used to believe the week from late December to early January is especially profitable, but the world has changed
- The markets used to grant investors an average return of more than 1% in just one week during the "Santa Claus Rally.”
- But recent returns during this holiday period from Christmas to the new year are running much lower than 1%, with some even negative. More importantly, the success rate is below 50%.
- In fact, the average daily return during the holiday period is no better than the average daily return for all of December and January, making it a challenging time for traders who rely on this traditional belief.
The "Santa Claus Rally,” a term used to describe the tendency for stock prices to rise during the last week of December and the first trading days of January, supposedly starts about Dec. 25 and ends roughly Jan. 2.
Experts and institutions proclaim the S&P 500, the Dow Jones and the Nasdaq Composite have risen about 80% of the time during this period. Since 1950, the average returns for these indices during the Santa Claus Rally have been 1.3% for the S&P 500, 1.4% for the Dow and 1.8% for the Nasdaq Composite.
However, today's stock market differs from the market of the pre-2000 era—we’re now in one of the strongest bull markets ever. So, we wanted to see if the "Santa Claus Rally" still happens.
To that end, we looked at the performance of SPY, QQQ and DIA from Dec. 25 to Jan. 2 over the past 15 years.
What did we find? Contrary to historical patterns, the "Santa Claus" returns have not been as strong of late. The S&P has shown a small positive return, but the other two indices have not averaged any gains. More importantly, fewer than half of the occurrences in these indices resulted in positive returns.
Even though the S&P shows an average positive return, its performance is similar to any random week over the long term, making it hard to confidently invest during this time.
Some might think this holiday period could give better returns than the average for December and January, making it an appealing time to trade. We compared its average daily return with those of December and January.
We found no evidence the performance during the Christmas holiday period is better than that of December and January overall. Keeping a consistent trading strategy without too many adjustments during these months could lead to higher long-term returns.
While the "Santa Claus Rally" might have been important in the past, the market keeps changing. Based on data from the past 10 to 20 years, trading during the holidays doesn't guarantee better returns.
Kai Zeng, director of the research team and head of Chinese content at tastylive, has 20 years of experience in markets and derivatives trading. He cohosts several live shows, including From Theory to Practice and Building Blocks. @kai_zeng1
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