As the holiday season begins, we are nearing what is commonly referred to as the “Santa Claus Rally” in the stock market. Specifically, this rally encompasses the final five trading days of the current year and the initial two days of the subsequent year. For instance, in 2023, the seven-day Santa Claus Rally is set to begin tomorrow, starting on Friday, December 22nd, and extending through Wednesday, January 3rd.

Yale Hirsch, the originator of the Stock Trader’s Almanac, introduced the term “Santa Claus Rally” in 1972. This came about as he observed a positive trend in the stock market from 1952 to 1971, with gains occurring in 17 out of 20 years and averaging a 1.35% increase. Since 1950, the S&P 500 has maintained a similar average return of approximately 1.3%, recording positive results in 59 out of 72 instances (equating to an 81.94% success rate for those tracking these statistics).

The factors behind the Santa Claus rally can be traced to various elements, including tax loss harvesting, diminished trading volume, and the overall optimism associated with the holiday season. However, our emphasis lies in exploring the years when this rally yielded negative results.

(Source: LPL Research, FactSet)

As the saying goes, “If Santa Claus should fail to call, bears may come to Broad and Wall.” In the five instances spanning from 1999 to 2019 when the Santa Claus rally was absent, the subsequent year saw negative outcomes three times and more subdued positive results in the remaining instances. While the arrival of Santa hasn’t consistently translated to positive results in the following year, the absence of the rally would be something to take note of as we head into 2024.

Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser

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