What is the Santa Claus Rally?

The Bank of America (BofA) has confirmed that “the Santa Claus rally is real.” When Santa comes to town, investors rejoice much like kids. The holiday season’s enthusiasm spills into the financial markets, giving rise to end-of-year seasonality in the last week of December. The rally creates abundant opportunities for traders to capture market movements. Take a deep dive into how it may affect your trading strategy.

The Santa Claus Rally

The higher-than-usual rise in stock prices between Christmas and New Year is called the Santa Claus Rally. As BofA says, the last 5 trading days of December and the first 2 of January exhibit characteristic positive seasonality. Yale Hirsch, who coined the term Santa Claus Rally, also listed December as the third-strongest month for stock market performance. Therefore, it is important to learn about the rally and fine-tune your trading strategy to it.

Rally or not, this period is considered an indicator of the following year’s market direction. Since 1945, the S&P 500 has posted gains 77% of the times during the last 5 trading days of the year and the first 2 of the new year. Therefore, closely watching the stock market is important to identify trading opportunities. 

Catalysts of the Santa Claus Rally

Non-believers consider the Santa Claus Rally an outcome of confirmation bias, given the optimism surrounding the festivities. However, believers credit the following factors for the rally:

Tax-Loss Harvesting

Tax-loss harvesting is a popular year-end trading strategy, where investors take a loss by selling profitable assets to offset the tax liability on their capital gains throughout the year. They purchase these back early in the following year. Usually, this factor is priced in during the last two weeks of December.

Low Volume, High Optimism

Year-end bonuses and the optimism around Christmas tend to enhance risk tolerance among traders. Low-volume trading is often driven by retail investors, who are filled with bullish sentiment about the markets. The demand from this group of traders drives the rally, while larger institutional investors are away.

Holiday Spending

Sales of consumer goods, such as food, gift items, home essentials, etc., rise during the holiday season. Increased spending drives year-end growth, which can be observed in the stock valuations of related businesses.

Energy Demand

Typically, energy demand increases due to the cold weather in December and January. This also supports the rally. However, many other factors, such as the geopolitical environment and oil and gas prices significantly impact the energy markets. 

Is the Santa Claus Rally Happening in 2024?

Between 1999 and 2023, Santa Claus visited Wall Street 19 times, which means the rally occurred 79% of the time. The S&P 500 has gained an average of 1.5% during the rally since 1950. 

Current State of the Markets

On December 10, 2024, the global benchmark, S&P 500, was up 27.62% year-to-date. Meanwhile, the DJIA and Nasdaq 100 added 17.73% and whopping 29.60%, respectively. The market growth may continue as indicated by several factors, such as:

• As of 2024, the probability of a December rally stands at 74%, rising to 83% during a year of presidential elections in the US. Goldman Sachs noted that a Santa Claus Rally that occurs in an election year may continue till January 20 of the following year.
• Artificial intelligence-powered strength in the technology sector is expected to continue as generative AI penetrates deeper into business operations and decisions.
• While you are looking for signs, Wells Fargo has claimed that Santa came early to Wall Street in 2024, thanks to the Trump-trading that began after he won the US election. This is because of speculations of a reduction in corporate taxes and more stock buybacks under the Trump administration. This may also support the rally.

Taking Advantage of the Santa Claus Rally

Here are a few tips for beginners to take advantage of the Santa Claus Rally:

• Assess your trading budget to set the tone for trading the rally. You can start by adjusting your trading goals and rebalancing your portfolio.
• Regularly monitor market movements to stay updated and refine your trading strategy.
• Keep your mindset and trading strategy flexible to adapt to market changes as the rally builds up and cools down.
• Keep an eye on broader market trends and make informed trading decisions based on technical and fundamental analysis. The January performance is a harbinger of the year-round outlook. It may help you plan for the year ahead.

However, past performance does not guarantee future success. For instance, 2022 broke a 7-year streak of Wall Street performance, despite the Santa Claus Rally of December 2021. High interest rates and inflation are to be blamed for this. As of December 2024, headwinds from global geopolitical tensions continue to threaten market stability. Therefore, while exploring market opportunities, always manage risks by:

• Employing risk limits, such as stop loss and take profit, to exit positions on time in volatile markets.
• Set up alerts to stay prepared with early signals and specific market movements to take necessary action.
• Use CFDs to hedge larger positions in the direction of the market with smaller positions in the opposite direction to minimise risk exposure.

While the rally might last for only 7 days, experienced traders weigh in the effects of the rally much in advance. This is reflected in their trading decisions from mid-December.

To Sum Up

• The December-end market strength that continues into January is called the Santa Claus Rally. 
• It spans the last 5 trading days of December and the first two of January of the following year. 
• The Santa Claus Rally is driven by low trading volumes, tax-loss harvesting and trader optimism.
• Traders must refine their trading strategy and risk management techniques to take advantage of market movements.

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