The Almanac Investor1: Profit from Market History and Seasonal Trends, written by Jeffrey A. Hirsch, J. Taylor Brownhas, offers a great little saying about the Santa Claus Rally and the January Effect: ‘If Santa Claus should fail to call; bears may come to Broad & Wall.’
For those of you who don’t know, a Santa Claus Rally is a surge in the price of stocks that often occurs in the last week of December through the first two trading days in January.
Reasons for the Santa Claus Rally
- Year-end tax-related portfolio adjustments.
- Holiday-season-induced optimism.
- A disproportionate number of short sellers are on vacation.
According to the Stock Trader’s Almanac2, the experts on seasonal market movements, the market rises between Thanksgiving and New Year’s about 70% of the time.
The January Effect, many stock analysts agree, is one of the most reliable seasonal patterns in the stock market. Small stocks and the prior year’s underperformers tend to do particularly well at this time of year.
Reasons for the January Effect
- It’s a rebound from tax-loss selling that depresses the market in December. The sellers buy back the losing stocks they sold for the tax offsets in December.
- Institutional money managers sell their losers and risky bets in December so they can show clients a more reassuring portfolio at year-end.
- These window dressers then buy back the stocks—or replace them with different small or risky stocks—in January.
According to The Almanac Investor, the S&P 500 has average a 1.6% gain during the Santa Claus Rally period since 1969. See chart below:
As the chart reveals, there have been a number of years when the so-called Santa Claus Rally has failed to come about. Those years include 1990, 1999, 2004, 2007, and 2014. The orange line indicates that the average Santa Claus Rally returns for 1999 and 2007 are negative.
A word from Bill Stone, investment strategist
Bill Stone3 is executive vice president and global chief investment strategist for PNC Financial Services Group Inc., a multi-billion Pittsburgh-based financial services corporation.
He is responsible for leading the strategy teams for PNC Wealth Management®, PNC Institutional Asset Management® and Hawthorn, PNC Family Wealth® in monitoring the factors that influence the direction of domestic and international financial markets.
He recently observed: ‘When the Santa Claus Rally is not realized, the New Year is dominated by the bears. For example, the January following the 4% decline in 1999 began a 33-month decline in the S&P 500. Also, the decline in the S&P 500 at the end of 2007 kicked off the second-worst bear market in modern history.’
Dave Ritcey, The Ritcey Team, Scotia Wealth Management