As the first month in the final quarter of 2022 wraps up, traders and investors are likely excited for a potential Santa Claus Rally.
That’s particularly the case this year, which saw the S&P 500 SPX plunge 27.54% between Jan. 4 and Oct. 13.
Therefore, a Santa Claus Rally would be welcomed by most traders hoping to tee 2023 off on a high note. But first, what is a Santa Claus Rally?
What Is A Santa Claus Rally
The phenomenon, given its label by analyst and creator of the Stock Trader’s Almanac Yale Hirsch, generally takes place during the last week of December into the first few days of January. Some years, the rally has taken place over an extended period, beginning Dec. 14 and lasting over two weeks.
Historically, during a Santa Claus Rally, the S&P 500 has risen an average of 1.3% but it doesn’t happen every year so it isn’t 100% predictable.
Past Santa Rallies
- Between Dec. 20, 2021 and Jan. 4, 2022, a Santa Claus rally caused the S&P 500 to surge 4.98%.
- The year prior, between Dec. 1, 2020 and Jan. 4, 2021, the ETF spiked 2.43%.
- Between 1960 and 2020, Santa Claus rallies happened about 66.66% of the time
- Since 1993, the occurrence took place 67% of the time, per Stock Trader’s Almanac.
What’s interesting, is that during bear markets and economic downturns, the rally can be stronger.
A bear market is generally recognized when the S&P 500 declines more than 20% from the high of the previous bull market. This year, the S&P 500 officially dropped into a bear market the week beginning May 16.
Santa Claus Rallies In Bear Markets
A look back at the last three bear markets, beginning in 1990.
- The three-month-long recession that occurred between July 1990 and October of that same year saw the S&P 500 plummet 20.14%. That year, traders weren’t gifted a Santa Rally and the S&P 500 declined 6.27% between the weeks beginning Dec. 17 and Jan. 7.
- The bear market that started in 2020, which was brought on by the collapse of the housing market, lasted a whopping 33 months, occurring between January, 2000 and October, 2002. Over the holiday period, between Dec. 26, 2000 and Jan. 2, 2001, the S&P 500 spiked up 2.62% before continuing in its downtrend. The following year, between Dec. 17 and Dec. 31, the ETF rose 4.47%.
- The Great Recession, which lasted for 17 months between October 2007 and March 2009, saw two Santa Rallies take shape –a 1.32% jump during the week beginning Dec. 17, 2008 and 6.81% surge higher over the course of the week beginning Dec. 29, 2008.
Theory Behind The Phenomenon
A number of catalysts may contribute to the rally:
- The end of “tax-loss-selling season,” which begins during the fourth-quarter, where traders and investors sell losing positions to minimize capital gains from profits in the stock market, the housing market or other income sources.
- The receipt of holiday bonuses that traders and investors may decide to invest because the bonus is viewed as “extra money.”
- A period driven by retail traders, who generally have a bullish bias, while Wall Street investors have largely left their desks for vacation.
- The expectation that a rally will take place, which causes a high number of traders and investors to buy stocks, resulting in a self-fulfilling prophecy.
The Look At The Odds
Over the course of the last three recessions there have been five holiday periods and a Santa Rally has taken place during four-out-of-five of those periods (80% of the time), beating the 66.66% overall average.
Out of those 4 times that a Santa Rally has occurred, the S&P 500 increased an average of 3.8%, beating the overall average of Santa Rally spikes by 2.5%.