Every year as the excitement of Christmas morning begins to wane, there is one group of people for whom the anticipation is just beginning to rise. Who are these Christmas late-bloomers? Why, investors, of course. Instead of dreaming of sugar plum fairies and presents under a tree, they dream of a market phenomenon known as the “Santa Claus Rally.”
What Is The Santa Claus Rally?
Over the years, market analysts and investors have noticed a strange pattern. During the trading days between Christmas and New Year’s, markets almost always go up. Because of its proximity to Christmas, this year-end rally has been dubbed the “Santa Claus Rally.”
In fact, during the last five trading days of the year and the first two after New Year’s, markets have yielded positive returns in 34 of the past 45 holiday seasons. Though they do see some declines, the average returns for each of these seven days are positive, with a cumulative return over that time period of 1.4%.
This isn’t a recent occurrence, either. If you go back all the way to 1896, the Dow Jones Industrial Average has risen 77% of the time and gained an average of 1.7% during this seven day period. (1) This is more than just coincidence.
What Causes The Santa Claus Rally?
Clearly, there is something going on the last week of the year that is unique. But what is it? There is no definitive answer and it seems that every expert has their own hypothesis.
Perhaps it’s investor optimism brought on by the holiday season. It’s common for people to be more cheerful and hopeful during such a joyful time of year. Or, it could be something more rational, like year-end tax-related portfolio adjustments. It could even just be the fact that a lot of short sellers are on vacation.
Some people suspect that fund managers buy up stocks that have performed well during the year in order to make their holdings look better. Or everyone is investing their Christmas bonuses. Another popular hypothesis is that the “Santa Claus Rally” is brought about by anticipation of the “January Effect,” where more funds are injected into the market at the beginning of the year and prices go up. Most likely, it’s a combination of these factors and more.
Will There Be A Santa Claus Rally This Year?
What about this year? Will Santa visit Wall Street in 2017? As it always is with the markets, there’s no way to know for sure. Experts have been predicting bear markets for years now, but the bull just keeps on charging.
So far this year, the markets have performed impressively. The S&P 500 is up over 17% year-to-date (2) and the Dow Jones Industrial Average is up over 22%. (3) At the rate things are going, many people expect it to continue into 2018.
Looking into the future, though, there is a lot going on in Washington that could affect the markets. The proposed corporate tax cuts would be a boon for the markets, but a possible government shutdown could throw a wrench in things. Many analysts are watching the Fed to see if they raise rates in December and how they will proceed for 2018.
As you can see, even with markets as strong as they are right now, there is no way to predict with certainty if things will go up or down at the end of the year. Either way, we at PCWA wish you and your family a wonderful holiday season filled with love, joy, hope and peace, and perhaps even a Santa Claus Rally.
If you have any questions about the markets or your portfolio, please contact us by phone at 303-945-2222 or email us at firstname.lastname@example.org.
Barry Steelman, AIF® is the Founder, Principal, Managing Partner, and Client Advocate at Private Client Wealth Advisors, a registered investment advisory firm based in Denver, Colorado. He specializes in working with individuals, families and businesses and conducting financial planning, portfolio management and retirement plan services. Along with more than two decades of experience, he is an Accredited Investment Fiduciary®, which signifies knowledge of fiduciary responsibility and the ability to implement policies and procedures that meet a defined standard of care. Learn more about Barry by visiting www.privateclientwealthadvisors.com or connecting with him on LinkedIn.