Is the Santa Rally Coming to Town?

BY Leslie Thompson | CFA®, CPA, CDFA™, Chief Investment Officer, Co-Founder | Dec 9, 2022

Christmas is now just over two weeks away. While children are dreaming about the gifts Santa will leave under the tree, many investors are hoping he will deliver a year-end market rally. The Santa Claus Rally refers to a historical tendency toward positive equity returns during the last week of the year and the first couple of days in the New Year. The period encompasses the last five trading days of the year and the first two trading days of the New Year, seven trading days combined. Markets have historically seen outsized returns in the second half of December, but this is especially true when examining only the seven-day trading following Christmas.

Several theories have been offered to explain the Santa Rally, including tax positioning, a general sense of happiness and optimism on Wall Street, and possibly that many large institutional investors wrap up most of their business before the holidays to go on vacation, leaving most of the trading to retail investors who tend to be more optimistic.

The chart shows the S&P 500 (SPX) Santa Claus Rally price returns from 1957 through 2021, depicted from strongest to weakest.

Whatever the reason behind the tendency, the S&P has posted an average gain of 1.10% during this period (from 1957 through 2021), which is not bad for a one-week return. Not only has the Santa Rally produced relatively strong 7-trading day returns, but it has also shown an impressive batting average – since 1957, the S&P 500 has posted a gain during the period nearly 74% of the time. During the years in which the Santa Claus rally produced a gain, the average improvement was 2.06%. The best Santa Clause rally came in 2008, as the SPX gained 7.45%. On the other hand, during the years that the Santa Claus Rally brought coal, the average loss was -1.6%, the worst performance coming in 1999 when the SPX posted a return of -4.04%. Last year, the S&P was slightly near its historical average, producing a 1% gain during the Santa Rally.

The other major U.S. benchmarks have had similar returns. Since 1972, the Nasdaq (NASD) has had an average Santa Rally gain of about 1.5%, producing positive returns 70% of the time. Meanwhile, since 1900, the Dow (DJIA) has also gained a 1.5% on average, with 75% of the returns being positive. 2022 has not provided many gifts, with the S&P 500 down more than 17% year-to-date (through 12/7). However, that should not dash hopes of Santa delivering a rally this year.

Since 1958, the S&P 500 has finished the year down 10% or more 10 times, and given where SPX currently sits; it seems quite possible that 2022 could be number 11. In those years, the Santa Rally has produced an average gain of more than 3%, far higher than the average across all years, with eight of ten years producing gains. The three largest Santa Rallies — 2008, 1974, and 1973 — each came in years when the S&P finished down 10% or more.

One point contrary to the historical bias of the Santa Rally is the negative slope of the trend line seen on the chart below, meaning that we have seen the magnitude of the Santa Claus Rally decrease over time.

Of course, there is no way to know what this year has in store, whether the last week of the year will usher in another rally or if Santa will leave behind a lump of coal. This year has certainly provided ample reason to be pessimistic. However, some of the worst years have produced some of the largest Santa Rallies. Only time will tell.

Some of the information provided herein has been obtained from third parties, which are believed to be reliable, but no reservation or warranty is made regarding the accuracy or completeness of such information. Indices are shown to reflect general market performance and are provided for informational purposes only. Past performance may not be indicative of future results. Therefore, a current or prospective client should not assume the future performance of any specific investment or investment strategy (including the investments and investment strategies recommended by Spectrum) will be profitable or equal to past performance levels. Note:  An investor cannot invest directly in an index.