Because I do not have a crystal ball (my frequent refrain), I hold back on all manner of attempts to beat the market, and that includes trying to predict the effect of the so-called Santa Claus rally in the final week of the market year. But as one client tells me, “It’s just fun to watch for it.”
Most years, we do in fact see a market rise at the end of December. The Santa Claus rally refers to the last five trading days of the year and, by some definitions, a combination with the first two trading days of January. The phenomenon was identified in the early 1970s and has been tracked since then.
Academic researchers have analyzed the rally through decades of data and have attempted to draw conclusions we can rely on. “Daily returns during the holiday period showed both a higher mean and more desirable risk metrics than returns for the rest of the year” (Nippani et al., 2015). But that observation is not as encouraging as it sounds.
The Santa Claus rally is an example of a timing strategy. Generally, a timing strategy involves buying and selling a particular security/stock based on a set of rules. The Santa Claus rally has rules about the day of the year. Rules could also be about activity in the stock market. In a recent study of 720 timing strategies, only 30 strategies had potential to reliably generate positive returns, and they were “highly sensitive to specific time periods” and other parameters (Dai & Dong, 2023). In other words, even the most promising timing strategies may not work in the future.
The problem with acting on historical analysis of a timing strategy such as the Santa Claus rally is that the gains and losses from year to year do not reflect the costs and risk of trying to “beat” the rally market. Considering trading costs, tax implications, opportunity cost of diverted funds, etc., makes the Santa Claus rally not much different from trading decisions throughout the year: the whole picture is more important than any one event.
Dai, W., & Dong, A. (2023, October 11). Another look at timing the equity premiums. Accessed: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4586684
Nippani, S., Washer, K. M., Johnson, R. R. (2015, March). Yes, Virginia, there Is a Santa Claus rally: Statistical evidence supports higher returns globally. Journal of Financial Planning. Accessed: https://www.financialplanningassociation.org/article/journal/MAR15-yes-virginia-there-santa-claus-rally-statistical-evidence-supports-higher-returns-globally
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