Dear Santa, all I want for Christmas is a rally! 

Let’s hope Santa comes through…

Each and every December, investors wait in anticipation hoping to see what the jolly big guy in the red suit brings.

No, I’m not talking about gifts under the tree.

I’m referring to a stock market rally that often comes about in late December…

It has become affectionately known as the “Santa Claus Rally.”

Yale Hirsch first made this observation back in 1972 and shared it in his annual publication, The Stock Trader’s Almanac.

The Santa Claus Rally is a seasonal phenomenon where the S&P 500 index performs exceptionally well during the last five trading days of the year and the first two trading days of the new year.

Now, it’s not a sure thing of course – it doesn’t happen every year. However, its track record is nothing to scoff at either. 

According to the Stock Trader’s Almanac, during those seven trading days since 1950, the S&P 500 index has gained an average return of 1.3%. 

And it’s not a rare occurrence, either. 

It’s happened in about 80% of the years since 1950. Not too shabby.

Why Does A Santa Claus Rally Happen?

No one knows for sure why stocks often rally in December.

The rally itself is simply based on long-term statistics about how investors tend to behave around the end-of-the-year holiday season.

Some would suggest the S&P 500 rallies because institutional investors go on vacation over the holidays and aren’t actively trading during that time.

That leaves retail investors (who tend to be more bullish at year-end) in the absence of large institutional investors. They’re able to exert more control over the market because of it, causing stock prices to rise.

The Santa Claus Rally, like many seasonal patterns, implies that sentiment matters. 

Unfortunately, this year investor moods are anything but jovial.

Was Monday’s release of lower CPI data enough to improve investors’ outlook moving into the new year?

Are investors willing to engage in a little year-end buying?

The bottom line is this…

Like other calendar effects, including “Sell in May and Go Away” or the “January Effect,” there is strong evidence that the Santa Claus rally is real. 

But, just because the Santa Claus rally is statistically a real thing, it doesn’t mean it will happen this year.

Not to go all Scrooge on you, but the saying goes, “If Santa Claus should fail to call, Bears may come to Broad and Wall.”

The intersection of Broad and Wall is the home of the New York Stock Exchange.

And the old adage means that when there’s no Santa Claus Rally, it often means poor performance for stocks in the new year.

So, it will be interesting to track Santa’s progress in the coming weeks, as it often foreshadows things to come.

But whether Santa comes to call or not – it is time to start thinking about your resolutions for your portfolio next year.