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Over the course of the S&P 500’s history, certain months of the year deliver higher returns than others. November through January is statistically quite bullish, as November returns 1.42% on average, December returns 1.37% on average and January returns 0.98% on average.

On the contrary, August and September are historically bearish, returning -0.26% and -0.57%, respectively. Analysts have suggested that there is a turn-of-month effect on the last few days of each month where stocks tend to see more gains at the end of months and beginning of the subsequent month. Trading the last four days of a month and then the next two days produces positive gains 64% of the time. If the turn-of-the-month phenomenon is a real trend, do stocks tend to rise even more at the end of a calendar year?

The Santa Claus Rally suggests so.

Is Santa Real?

The “Santa Claus Rally” was coined in the early 1970’s by a stock market analyst who noticed an anomaly of generally higher market returns between the first trading session after Christmas, and the first two trading sessions of the new year.

According to The Stock Trader’s Almanac, the S&P 500 has gained an average of 1.3% since 1950 during the Santa Claus Rally periods. More recently, since the inception of the SPDR S&P 500 ETF Trust (SPY) in 1993, the Santa Claus Rally has produced gains 18 out of 27 times, or about 67% of the time. According to Gordon Scott, a member of the Investopedia Financial Review Board, since 1993 all other six-day periods produced positive SPY returns 58% of the time.

The Santa Claus Rally that produced the best returns was at the end of 2008 and beginning of 2009 when a recovery from the financial crisis was getting underway. According to The Stock Trader’s Almanac, the S&P 500 rallied 7.4% in the six-day period between 2008 and 2009--almost double the gains of the next strongest rally.

The second-best rally came ten years later at the end of 2018. These two rallies were derived from similar circumstances, as the 2008 rally came at the end of the worst year for the S&P 500 since the Great Depression, and the 2018 rally came at the end of the worst year for the S&P since 2008. 

After the Rally

Even though 2008 produced the largest gains in this period, the S&P 500 fell 10.95% from January 5, 2009, at the end of the rally, to January 31, 2009. On the contrary, the Santa Claus Rally represented a turning point for the S&P 500 heading into 2019. On December 24, 2018, the S&P 500 was amid its worst December since 1931 before rallying over 6%. The S&P 500 still ended the month with its biggest loss since the Great Depression, but the Santa Claus Rally helped pare some of those losses and then act as a springboard as January produced gains of 7.69%.

It is worth noting that the final week of the calendar year normally trades on lower volume than any other week.

That doesn’t change the fact that the last four trading sessions of a year and first two sessions of the next year produce, on average, larger gains. While past results are not indicative of future returns, history can tell us something, and the Santa Claus Rally has happened 67% of the time over the past 27 years. It’ll be worth watching again as we continue on the road to economic recovery.


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