Is the "Year-end rally" real and is Santa Claus bringing us presents?

November's market update puts us into a holy jolly Christmas mood! First we'll have a look at reasons for Santa Claus to descend on Wall Street, look at his historic visits and then demystify his appearances.

 
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In financial literature, the โ€œYear-end Rallyโ€ is often referred to as the โ€œSanta Claus Rallyโ€. ๐ŸŽ… A term that is way catchier and which we will therefore obviously use throughout this market update.

Definition

The Santa Claus Rally stands for a seasonal rise in stock prices. In some resources, this includes all of December, but more of them specify it to be the last days of the calendar year - between Christmas and New Year's Day and the first 2 trading days in January.

 

๐Ÿง Why does something like the Santa Claus Rally exist?

As most of mankindโ€™s schedules (no matter which religion) are based on the Gregorian calendar, lots of business and private life is organized in yearly cycles. The end of the year, the 31st of December, therefore usually refers to the end of reporting periods, the end of budget plans, the end of trying to follow through with resolutions you made in January. ๐Ÿ’ช And then coupled with Christmas, there are a few factors said to provoke this kind of rally:

  • Well, consumerism. Sales spike, people buy ALL the things. Especially on December 23rdโ€ฆ am I right? ๐Ÿ˜‰

  • The anticipation of a positive start into the next market year

  • "Window-dressing" - fund managers try to prettify the performance of financial portfolios ๐Ÿ’„

  • Strategic buying and selling due to tax reasons

  • Christmas holiday money and bonuses are paid out and animate people to more generous purchases


๐Ÿค“ An example using the S&P 500 Index

Letโ€™s have a look at real numbers of some stocks, as those get mostly impacted by the Santa Claus gift giving craziness. The Standard & Poorโ€™s 500 Index (Selma clients usually have it in their investment plan) reported since 1950 that

1) December showed positive growth in 48 out of 68 years.

2) the time between Christmas and January 2nd showed an average growth of 1.35% on average.

 
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๐ŸŽ„ Selmaโ€™s take-away

It all sounds very positive, right? ๐Ÿ’ธ Though aphorisms and the belief in Santa Claus might not be the best guides for investment decisions. Even if Santa often brought presents, there were years with distinct declines too. There are no recurring patterns, which is why it might not be feasible to hope history will simply repeat itself - even if Santa Claus stopped by in the last 2 years. ๐Ÿ”ฎ

Gambling during the rally is mainly left to day-traders. As it is with many other seasonal or daily rises - they should not change thoughts about your long-term investment plan. ๐Ÿ˜Ž

And so we leave you with a ... beautiful aphorism that Yale Hirsch coined back in 1968 in his first stock traders bible โ€œThe Stock Traderโ€™s Almanacโ€, full of concise investment advice:

 

If Santa Claus should fail to call,
bears may come to Broad and Wall

 

*Bears refers to โ€œBear marketsโ€ - markets with falling prices

*At Broad and Wall Street you find the New York Stock Exchange

*More of these market aphorisms & rhymes can be found in our social media 2018 advent calendar ๐Ÿ˜