What is the Santa Claus Rally?
They say Santa visits everyone, and apparently, he even visits those on Wall Street. This “visit from Santa” is often known as the Santa Clause Rally, and it has been happening for over 70 years. If you haven’t heard of the Rally, don’t worry, we’re going to cover everything you need to know in this article, so keep reading!
What is the Santa Claus Rally?
A Santa Claus rally is a stock market rally that occurs over the holiday season and causes stock prices to rise. The rally usually lasts seven days, starting the day after Christmas and ending the second trading day following the New Year.
The term "Santa Claus rally" first appeared in 1972, when market analyst Yale Hirsch noticed that market returns were unusually strong in the days following Christmas and the days leading up to the first few days of the New Year. From 1950 to 2020, this phenomenon has occurred 57 times, with the S&P 500 rising 1.3 % on average. The S&P 500 was presented in its current form in 1957. Before that time, it was known as the Composite Stock Index and tracked 90 stocks.
One of the largest Santa Claus rally’s happened in December 2008 and January 2009. The S&P 500 gained 7.36 % over a seven-day trading session that began on December 24, 2008, and ended on January 5, 2009. This surge provided some relief to the index, which had lost more than 40% of its value by that point in the year.
There are various theories about why Santa Claus rallies occur, but pinpointing the specific reasons is complicated. According to some analysts, it's due to the act of tax-loss harvesting, which involves investors selling shares at a loss to reduce a capital gains tax liability. There's also the argument that holiday spending can help increase stock prices and boost firms' bottom lines. Finally, some experts believe that one factor driving the Santa Claus rally is the bullish market mood, which is high throughout the Christmas season due to investors feeling optimistic and joyful. Regardless of what causes the rally, it’s an observable effect, occurring roughly two out of three years.
Effect On Investors
Individual investors' impacts from the Santa Claus rally will vary depending on their financial goals and preferences. For example, passive investors may see some gains in their long-term investments but usually do not believe the rally is worth changing their entire investment portfolio. On the other hand, more active investors may strive to make their portfolios more aggressive to take advantage of the rally. While it's impossible to predict the rally’s effects, one thing is certain, don’t rely on it to permanently increase your portfolio.
Fun Bonus Information
Some believe Santa Claus rallies are leading signs for the future year. If a Santa Claus rally occurs at the end of the year, the following year will be prosperous. If the rally fails to happen, the next year will be a disaster. While we can't determine if this is factual, it is an interesting theory.
Yale Hirsch devised a whimsical saying to illustrate how a lack of a Santa Claus rally may affect the market. He said, "If Santa Claus should fail to call, bears may come to Broad and Wall," referring to the New York Stock Exchange's location.
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Here at Fourth Avenue Financial, we wish you and your family a happy and healthy holiday season. After the holidays, as the new year approaches, if you are ready to start planning for your financial future, we are here to help. Our first priority is your overall financial success. We want to help you develop, implement, and monitor a strategy designed to address your individual situation to ensure all your investments are setting you up for a path of financial success. Contact us at (304) 746 7977 to schedule a meeting with one of our experienced financial advisors or schedule online: https://calendly.com/fourthavenuefinancial/introductory-zoom.
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