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MARK-TO-MARKET: The history behind the Santa Claus Rally
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MARK-TO-MARKET: The history behind the Santa Claus Rally

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The Christmas season is filled with its share of traditions. For some, it’s a time of peace, joy and simple reflection with family and friends. For others, it’s a 31-day whirlwind reminiscent of Clark Griswold, infused with vast displays of lights, late-night eggnog benders and a Christmas tree that would challenge even the mightiest sequoia within our national parks. But the Christmas season also creates a stir of hope and tradition among the Wall Street investor community — the Santa Claus Rally.

The catchy holiday phrase was coined by noted stock market analyst Yale Hirsch back in 1972. Hirsch first mentioned the Santa Clause Rally in the 1972 edition of his Stock Trader’s Almanac, for which he created and authored. The almanac provides investors with insight on stock market analysis and trading strategies. This annual publication still exists today and is managed by his son, Jeffrey Hirsch.

While knee-deep in his analytical charts and graphs, Hirsch noted a trend that the stock market tended to rise in the last five trading days in December and the first two trading days in January. He expanded his research on this seven-day trading window by analyzing data on the Dow Jones Industrial Average all the way back to 1896. Armed with a mountain of research and confident in his results, Hirsch pronounced the now-famed Santa Claus Rally.

Over the past several decades, the Santa Claus Rally has provided some interesting results. Since 1969, this seven-day session has produced a gain 77% of the time — 40 gains vs. 12 losses — in the benchmark S&P 500 stock index. Within these 52 Santa Claus Rallies, the S&P 500 has produced an average gain of 1.3%. According to stock price and analysis company Trefis, there’s just a 31% chance the S&P 500 produces a 1.3% gain during a random seven-day trading period. Thus, the Santa Claus Rally produces a gain more than twice as often as one would normally expect.

The biggest loss was in 1999, when the Santa Claus Rally provided a lump of coal and the S&P 500 lost 4%. The biggest gain was in 2008, when Santa delivered a massive 7.4% seven-day gain. More recently, within the last 10 years, the Santa Claus Rally has reported eight gains and two losses. In 2020, the S&P 500 managed to eke out a modest 0.3% gain.

Admittedly, one shouldn’t read too much into a seven-day trading span, which is just a tiny fraction of the roughly 253 trading days over the course of the year. Trading activity tends to be rather light during the last six weeks of the year. Many traders take time off during this stretch, which includes Thanksgiving, Hanukkah, Christmas, New Year’s Eve and, for some, Festivus. Traders also tend to lock in their annual profits by the start of December, not wanting to risk their hard-fought gains — and performance bonus — in the final weeks of the year.

There’s no official rationale behind the historical stock market gains of the Santa Claus Rally. Perhaps it’s the general optimism that surrounds the holiday season. Others contend it’s a short-term conviction on the retail holiday shopping season, which is the 61 calendar days in November and December. The holiday shopping season is by far the biggest season for retailers. As consumer spending accounts for more than two-thirds of all U.S. economic growth, one could argue investors are hopeful the retail holiday shopping season could provide a spark to the economy and future gains in the stock market.

Whatever the reason, the Santa Claus Rally often provides a welcome respite from the usual chaos of the stock market. And as Clark Griswold can attest, a seven-day rally in the stock market sure beats a one-year membership in the jelly-of-the-month club.

And to you, the readers, I wish you all a very joyous and Merry Christmas.

Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the U.S. Securities Exchange Commission.


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