A guide to the Santa Rally: is it real and when does it start?

What is the Santa Rally?

The Santa Rally is a stock market phenomenon during which there’s a sustained rise in the value of shares during the last week of December and the first two trading days of January – usually a six-day period. The term was first coined in the early 1970s by an analyst called Yale Hirsch, who noticed the tendency for stock markets to rise over the period.

Ever since his discovery, other market commentators have set out to decide whether or not the phenomenon is fact or fiction. 

There are a number of stock market anomalies that occur at different times of the year, which although often unreliable, can inform the strategies traders and investors employ. While the natural position to take in a Santa Rally is long, by looking at previous years, traders can get an idea of where to set stops and limits.

Regardless of whether you decide to trade the Santa Rally or not, it’s important to understand the market movement in order to manage your risk. That said, it’s worth pointing out that such a short-term movement won’t hold much influence over buy-and-hold strategies.

Is the Santa Claus Rally real?

The Santa Rally is real, but it’s not always reliable. While the phenomenon is regularly occurring, it has no definite cause, which makes it difficult to predict. And remember, past results never guarantee future performance.

That being said, the Santa Rallies that have caused the largest returns have taken place following a stock market crash.

What causes the Santa Clause Rally?

The causes of the Santa Claus Rally are very much up for debate. It’s thought that the occurrence is caused by the tax considerations of the end-of-year and holiday bonuses, alongside a general feeling of optimism that a new year creates.

Another common explanation is that institutional investors settle their books before they go on holiday over Christmas, leaving retail investors to drive market sentiment – who tend to have more bullish opinions. 

The most likely cause of the Santa Rally is the Santa Rally itself – in what’s known as a self-fulfilling prophecy. People have come to expect that the market phenomenon will occur, and buy accordingly, which leads the market to make gains.

What assets does the Santa Rally impact?

The Santa Rally is known to impact stocks across the world. Research has shown that value stocks – shares that are low in value compared to the company’s financial performance – outperform growth stocks – which hare shares that are expected to rise in value despite poor financials – during the Santa rally period.

The Santa Rally is most commonly talked about in terms of stock indices, mainly the S&P 500 and FTSE 100.

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S&P 500 Santa Rally

The Santa Rally has caused the S&P 500 to gain an average of 1.3% each occurrence since 1950. According to research by the Stock Trader’s Almanac, the Santa Rally has produced gains 18 out of 27 times since 1993.

The Santa Rally that produced the best returns for the S&P 500 was following the 2008 financial crisis when the recovery had just started. The index rallied by 7.4% over the six-day period.

FTSE 100 Santa Rally

The FTSE 100 also famously experiences a Santa Rally fairly regularly. In fact, the average monthly return on the FTSE 100 index in December is 2.02% - which is higher than any other month’s average other than April.

In 2020, following the Covid-19 pandemic, the FTSE 100 increased by 2.01% over the trading six-day period between December 24 and January 5.