Much like the debate about the existence of a certain old man in a red suit coming down chimneys, the markets had a dispute about the arrival of the “Santa Claus Rally” this year.
Before we dive into that, we need to explain what Santa Claus Rally means.
Every year around the last week of December comes an increase in stock market prices, commonly known as a rally. This phenomenon is known as a “Santa Claus Rally” in the financial markets. Given that this occurs just after Christmas and can only be observed after the first couple trading sessions following the new year, we are surprised it is not called “The New Year Rally”. There are multiple theories that explain why this happens, including the increase in shopping for the holidays, a general lift in the spirit and optimism, using holiday bonuses for investments, and investors sorting out their positions before going on vacation. Regardless of the reason, starting from the 1960s, more than 66% of all Decembers have ended in green for shareholders.
After the term was coined in the early 1970s to refer to the rising pattern that the markets form around that specific time of the year, analysts and traders kept wondering if it would happen every year. And although historical results can never guarantee the future, the data seems to support the rise in the percentage of rallies around this time more often than not.
So, unlike the white-bearded man in a red suit, there is certainly no doubt that Santa Claus rallies do exist. However, with the existence of many market anomalies, it may be a socially affected rally. For example, what if people stopped getting holiday bonuses at that time of year, had no reason to take vacations anymore, or even found a way to stop buying gifts! Therefore, there is no guarantee that the Santa Claus rally will continue in the future.
This brings us to the final question.
As we previously mentioned, it is practically impossible to predict market movements. However, now that the rally has ended, there is no doubt that Santa Claus has hit the financial markets this year and brought many gifts with him. Given that the Dow hit a new record close with up to 2.4% gains, we can undoubtedly say that it is the best Santa Claus rally since 2009.
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