Every Christmas, Santa Claus brings gifts for all the good boys and girls of the world. And for some investors, in the past, he has also brought a year-end boost to their portfolios.
What’s a “Santa Claus rally”?
You may not think that Santa has much to do with the financial markets, but it’s not unusual for the stock market to rise during the holiday season. These sustained increases in stocks, typically during late December and early January, are what many people call the “Santa Claus rally”.
What does a Santa Claus rally actually look like? On average, the stock market has gained 1.3% during the last five days of December and the first two days in January, since 1950, according to reports.
It’s important to note, however, that a Santa Claus rally doesn’t always occur, and there’s absolutely no guarantee that one will occur. For example, the S&P 500 missed out on a Santa Claus rally in 2004, 2007, and 2014.
What causes a Santa Claus rally?
There isn’t a single factor that contributes to a Santa Claus rally, assuming one occurs. But analysts typically point to increases in consumer spending. The holiday season is shopping season, after all, and consumers are opening their wallets for gifts, dinners out, and decorations.
And since many investors become preoccupied with the holiday shopping season, investing activity can dip—leaving an opening for other traders who scoop in and drive up stock prices. Other factors may include increased optimism about the economy, and a reluctance by governments and businesses to report bad news—in an effort not to dampen the holiday spirit.
Should you take a ride on Santa’s sleigh?
While the Santa Claus rally has occurred before, it’s important to remember that nothing is guaranteed. You’re likely better off sticking to a regular schedule by investing small amounts over a long period of time.
Remember, it’s time in the market—not timing the market.
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