As December dawns and the holiday spirit takes hold, investors turn their eyes to a market phenomenon known as the Santa Claus rally. 

This historical tendency for stock prices to rise during the last five trading days of the year and the first two of the next has captivated investors for decades.

First observed and named by Yale Hirsch in 1972, the Santa Claus rally is historically a period of markedly positive returns in the market. 

Since 1950, the S&P 500 has averaged a gain of 1.3% during this seven-day period. This seemingly magical boost has led to the rally becoming a cherished tradition, with many investors looking to capitalize on its potential.

It matters. But while the Santa Claus rally’s historical performance is undeniable, its significance is debated.

Some argue it’s simply a result of seasonality, driven by factors like holiday bonuses, tax considerations, and increased investor optimism. Others believe it reflects institutional rebalancing and window dressing, as portfolio managers seek to close the year on a positive note.

Regardless of its cause, the Santa Claus rally can offer a psychological boost to investors, fostering a sense of optimism heading into the new year. Additionally, for investors seeking to maximize their returns, it can present a valuable opportunity to generate additional gains.

Despite its historical consistency, the Santa Claus rally isn’t guaranteed — it’s skipped a handful of years since its discovery. Notably, it failed to materialize in 2008, 2011, and 2018, coinciding with periods of economic turmoil and market downturns.

Holiday bonuses, end-of-year tax considerations like realizing your gains, and rebalancing by portfolio managers and institutions all contribute, and could be entirely responsible for the bounce we see. 

More Facts and Details About the Santa Rally

• The Santa Claus rally has been observed since 1950 and named by Yale Hirsch in 1972.
• The average gain for the S&P 500 during the rally period is 1.3%.
• The rally has skipped a handful of years, most recently in 2018.

Will It Happen in 2023?

Predicting the market is always a tricky endeavor, and 2023 presents its own set of challenges. Inflationary pressures, rising interest rates and geopolitical uncertainties are all factors that might dampen the market’s festive spirit. 

Still, our favorite analysts remain optimistic. A strong labor market, robust corporate earnings and the potential for an economic “soft landing” may provide tailwinds for the market through December.

Whether we’ll have a Santa rally in 2023 remains to be seen. While the historical data offers a glimmer of hope, investors must remain cautious and evaluate market conditions carefully before making any investment decisions.