Snow in the air, holiday decorations, egg nog…yes, it is that magical time of the year when Wall Street pundits start prognosticating about a possible “Santa Claus Rally.”
Jim Cramer of “Mad Money” fame on CNBC believes, “stocks may fall further before powerful 'Santa Claus rally' kicks in.”
Similarly, from Seeking Alpha: Santa Claus Rally Is Coming, But Will Markets Correct First?
Stock pickers even guess how Santa may help particular stocks, with headlines such as 7 Stocks That are Ready For a Santa Claus Rally or Seeking Santa; Finding the top shares for the 2021 Santa Claus Rally or even COVID Correction Or Santa Claus Rally? 3 Top Stocks For Any Course.
And it’s not just financial markets, even Bitcoin aficionados are hoping for some of Santa’s magic.
First coined in 1972, the Santa Claus rally is a stock market surge that is supposed to occur in the last five trading days of the year and the first two trading days of the new year--though sometimes, it is broadened to stock performance in most of December.
A strong Santa Claus is also supposed to portend up markets for the following year.
Historically, December has been a good month for stocks markets. From 1950 -2020, the S&P 500 has enjoyed 53 up years in December and only 18 down years, with an average return of 1.39%.[1] Not too bad, and it certainly beats lumps of coal in your stocking.
All kinds of reasons have been proposed for why December should have such strong results, including holiday optimism, holiday shopping, and holiday bonuses. But this wouldn’t explain why November has returned an average of 1.53% since 1950 and April (the best performing month of the year) averaged 1.56%.[2] Yet, surprisingly, no one speaks of an Easter Bunny rally.
And in case you are curious, the worst performing month, historically, is September, which has returned -.62% since 1950.[3]
While all this may be entertaining, unfortunately, there are some investors, many of them Wall Street pros, who take data mining anomalies such as the Santa Claus rally seriously, and try to profit from them. Sure, stocks have gone up 75% of the time in December. But this also means they fell 25% of the time.
Markets offer plenty of potential rewards for patient, long-term investors without having to rely on speculative short-term trading strategies named after fictional characters.
[1] www.moneychimp.com/features/monthly_returns.htm
[2] Ibid
[3] Ibid
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