Decades of investment data can reveal a lot of interesting patterns. A fun seasonal one right now is that of the Santa Claus Rally. Simply put, it’s the propensity for stocks to rally into the end of the year.
Originally, this trend was noticed in the last week of December and into the first few trading days of the next year. However, looking at the data, the last six weeks or so of the year tends to be good for the market on average.
Investors can expect an average move of 1.5 to 2 percent higher in the market. That’s enough of an historical trend to get investors excited.
Of course, there are a lot of other factors at play. At the end of the year, investors will book losses for tax purposes. As investors only do that on companies that have performed poorly, however, it simply means that those companies are likely to skip on the rally.
But in a great year like this year, companies that have been doing well are likely to keep doing well. While some investors may shy away, many fund managers will want to load their portfolios with top-performing names, so that they can show their clients that they were in that top performing stock—even if they actually missed out on the rally!
Looking at the details, the Santa Claus Rally has a few caveats to it. The most important one, of course, we’re just talking about the average year. 2018 was a below average year, as the markets were tanking into Christmas day. While they recovered a bit in the last week of the year, it still bucked the trend.
Investors looking for this type of seasonal rally need to look at how stocks have been performing in the autumn. This year, with the market heading up and near all-time highs, the rally is real.
There’s still some time to play it this year, but starting next year, if the market is trending up the week of Thanksgiving, consider buying some call options on the overall market to follow the trade for leveraged returns.
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