The year-end stock market rally is real, but Santa’s role may be minimal
Skeptical kids can doubt whether Santa Claus exists. But for stock market statisticians, there’s not much debate: The year-end lift known as the Santa Claus rally is no myth. The stock market typically posts modest but reliable gains in late December and early January.
“It’s pretty much like clockwork,’’ says Jeff Hirsch, editor of the Stock Trader’s Almanac, which tracks market trends. “And when it doesn’t happen, it can be a very helpful warning of impending trouble.’’
This year, the market began December in somewhat typical fashion, with a stagnant first half of the month. The Standard & Poor’s 500 is up just 0.6 percent so far in December, and the Dow Jones average is down 0.2 percent. That leaves room for the market to snap back by the end of the year, though stocks are still facing headwinds from lingering doubts about the economy, as well as trepidation among investors about the huge gains logged so far this year. The S&P is up 22 percent in 2009, the Dow 18 percent. The entire period around the end of the year, though, has a bullish track record. Consider:
■ November through January tends to be the best three-month span. Over the past four decades, the average gain from Nov. 20 through the end of January has been 4.2 percent, or an annualized rate of 23 percent, according to James Stack, president of InvesTech Research.
■ December is the best single month, with the Standard & Poor’s 500 averaging a 1.6 percent gain. The first December after a bear market ends performs even better, averaging 3.1 percent.
■ The S&P since 1950 has increased an average of 1.5 percent during the seven trading days that start with Christmas Eve. That’s the recognized period for the Santa Claus rally, as first identified in 1972 by Stock Trader’s Almanac founder Yale Hirsch, Jeff’s father.
■ Stocks went up in 12 of the last 15 of those year-end periods.
To better understand what drives the Santa Claus rally, let’s look at positive factors for the market that usually come together at this time of the year. The holidays are the strongest retail season of the year. Year-end investment reports tend to offer upbeat outlooks for the coming year, and often plug hot stock picks just as investors are repositioning their portfolios. And since investors are in a good mood this time of year anyway, more people tend to buy rather than sell.
“It’s one of the most reliable rallies of the year,’’ says Scott Marcouiller, senior equity strategist at Wells Fargo Advisers.
Even those who aren’t interested in stocks during the holidays would do well to keep an eye on the market. In years when there hasn’t been enough enthusiasm for a Santa Claus rally, it’s often been a sign that turmoil lies ahead.
After 1999, for example, when there was no Santa Claus rally, the market tanked in 2000. And a late-year drop two years ago was a forerunner to a disastrous 2008.
Dave Carpenter writes about personal finance for the Associated Press.