Any positive gain in the stock market around Christmas commonly leads financial market observers to refer to the Santa Claus rally. Yale Hirsch, the founder of the Stock Trader’s Almanac, coined the “Santa Claus Rally” in 1972. He defined the timeframe of the final five trading days of the year and the first two trading days of the following year as the dates of the rally. While this phenomenon is typical in the stock market, it may not translate similarly in the crypto market.

This rally in financial markets is not a mere coincidence but a manifestation of collective investor behavior influenced by the holiday spirit and strategic financial decision-making. It marks a period where markets often experience a surge in activity, with investors looking to capitalize on potential year-end gains. The narrative in this case is that stocks tend to do well in December because investors are in a cheerful mood as the holidays approach. Another contributing factor, presumably, is that by the time December rolls around, investors have finished selling stocks for tax-loss purposes and are looking to redeploy their cash. In the past two decades, the S&P 500 Index — a barometer of U.S. stock performance — has increased by 0.7% a year, on average, over those seven trading days, according to FactSet data. The S&P 500 was positive during those seven days in 15 of the 20 years — or 75% of the time, FactSet found.

Santa Claus rally hasn’t come yet. There’s still time, but will it even matter for stocks?

“You know those investment bankers, always on vacation,” said no one ever. Similarly in 2008, during the stock market crash caused by the financial crisis, stocks actually got a Santa Claus rally in the midst of a larger bear market rally. During the seven-day period, the S&P 500 gained 7.5%, although it would crash again in the first two months of 2009 before bottoming out on March 9. These seven days have historically shown higher stock prices 79.2% of the time, reflected in the S&P 500.

The Santa Claus Rally in traditional markets provides a reference point, but Bitcoin’s rally in 2023 is a unique event influenced by its distinct market dynamics and global factors. While historical data offers a backdrop, cryptocurrencies’ volatile and unpredictable nature necessitates a balanced and informed approach. We recommend that you conduct thorough research and seek professional financial advice before engaging in cryptocurrency trading, especially in seasonal trends like the Santa Claus Rally. Historically, the crypto market has shown a mix of trends during the end-of-year season, with some years witnessing significant rallies and others seeing more subdued movements. The anticipation of a Santa Claus Rally in Bitcoin is also tied to broader market sentiments, including global economic factors and investor behavior.

What Is A Santa Claus Rally?

There are different reasons that stocks don’t participate in the Santa Claus rally. Many of these are stocks that have grown at extraordinary rates previously. Oftentimes, the selloffs are due to a combination of valuation contraction and slower growth.

Tax-loss selling, ‘Santa rally’ could sway U.S. stocks after November melt-up

Traders should be wary of market talk surrounding the notion of a Santa Claus rally, and stay fixed on the current market environment. While we can expect Santa Claus to deliver presents on time, we can’t expect him to always deliver reliable stock-market gains. The second major question is whether the Santa Claus rally really even exists. Again, looking at the historical performance of the S&P 500 over the last two decades, we conclude that it is nearly a toss-up between a tangible rally and a normal trading week. Just like other calendar effects in the stock market, observers disagree over whether the Santa Claus rally is valid or useful. If you’d like to draw your own conclusions, here are some additional points to consider.

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These varied performances indicate a pattern of positive movement during this period, though marked by the fluctuations typical of the cryptocurrency market. In addition, when it comes to the average returns generated in December, Bestinvest’s analysis has revealed what could be an encouraging end of year pattern. Hollands pointed out that global equities have delivered positive returns 80% of the time in the month of December over this period, far higher than any other month. “The real Santa Claus Rally is the final five trading days of the year and first two trading days of the following year, not just December,” it stated. So, no, I wouldn’t load up on stocks in the hope of a December rally, although I would be thrilled if it happens. Nor would I “sell in May” or place bets depending on who wins the 2024 U.S. presidential election.

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This strategy is suitable for those who prefer a less active trading method and believe in the long-term value of Bitcoin. Several factors could significantly impact Bitcoin’s price during the Santa Rally. Economic indicators like interest rates, inflation, and geopolitical events are crucial. This event, which occurs approximately every four years, halves the reward for mining new blocks. Robert R. Johnson, PhD, CFA, CAIA, professor of finance, Heider College of Business, Creighton University explained that the Santa Claus Rally is typically more pronounced in small capitalization firms. In turn, returns are generally higher during the period and that the effect is considerably stronger for small-firm portfolios relative to large capitalization portfolios.

For example, bonuses may be calculated after the company’s fiscal year ends and its annual performance can be calculated. And even if a company awards bonuses in December, they might not show up in workers’ paychecks until mid-January. “Economists expect inflation to peak here in Q4 and for the next several quarters,” Marc Chandler, managing director at Bannockburn Global Forex, told me. Core PCE, which excludes food and energy costs, came in slightly hotter than expected, rising 4.7% year over year. The PCE deflator gained 5.7% from the prior year, which is in line with consensus estimates from FactSet. Meanwhile, technology — which is the largest sector in the S&P 500, is flat because some of the largest stocks (particularly Apple) have done well.

A Santa Claus rally is a market rally that causes stock prices to increase during the holiday season, typically a seven-day period beginning the day after Christmas and ending on the second trading day in the New Year. Several theories try to explain the Santa Claus rally, including investor optimism fueled by the holiday spirit, increased holiday shopping, and the investing of holiday bonuses. Another theory is that this is the time of year when institutional investors go on vacation, leaving the market to retail investors, who tend to be more bullish. According to Johnson, the holiday period has significantly higher average daily returns in the U.S. stock markets and in many other stock markets across the world. A Santa Clause rally is observed if the stock markets gain in the last five trading days of the year, going into the first two trading days of the following year.

Is There Really a Santa Claus Rally?

The S&P 500 on average drops 0.3% and returns only 4.1% for the new year 66.7% of the time, LPL said. Stevenson believes the markets are certainly looking oversold, pointing out that just 21% of leading US companies are above their 20-day moving average. UK market commentators have witnessed a Christmas rally on the stock market. According to Seasonax, the  average gain produced by the year-end rally is equivalent to an annualised return of 50.45%.

If you make trades based on some half-baked historical theory, the only guarantee is that you’ll end up paying more commissions and taxes. What’s more, you could be sitting on the sidelines when the market rises. The Santa Claus Rally is a time where slight gains may be seen in the stock market at the end of the year. The phenomenon happens most years, but the historical gains are minimal. In most years, the phenomenon lasts for just seven days, starting the day after Christmas and running until the second trading day of the new year.

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