Santa rally: why do stocks tend to rise around Christmas?

Ahh, it’s the season again. Chestnuts roasting on an open fire, Jack Frost nipping at your nose… and all those bloody Yuletide carols you can’t seem to escape from. Admit it, you little scrooge, nothing warms your cold, cold heart more than some scalding hot profits from the stock market.
And who cares about presents when all you ever get are sensible socks and knitted scarves from your well-meaning but misguided relatives? No, what you’re really looking forward to is a Santa rally.

For the uninitiated, a Santa rally refers to the annual trend of a strong upswing in stock prices in December, usually seen over the final week of trading until just after New Year’s day.

Now, while the fat man in the red suit may not have much to do with this, the taxman might. Some say the rally happens because the tax year ends December 31st in many countries like the US, so people are in a rush to complete trades.

Another reason might be that, at the end of the year, fund managers are keen on “window dressing”: to give more prestige to their fund, they tend to buy the shares that have performed better during the year, so on 31/12 their portfolio will look great.

Some say giddy investors are eager to invest their fat Christmas bonuses while the professional pessimists (that is, the short-sellers) are on vacation. Finally, it could also be a self-fulfilling prophecy – if people truly believe in the Santa Claus rally, then they’re more likely to buy stocks in this period. Investors may also be setting themselves up for January, when stocks typically outperform.

But there have been occasions when the Santa Claus rally did not materialize. This happened in 1990, 1999, 2004, 2007 and 2014.

This year, the recent agreement between China and the United States on tariffs could turbocharge the markets’ sleigh, but let’s not forget that, despite the ups and downs of the last few days, Wall Street’s ratings are still stellar.

Moral of the story: write your letter to Santa, leave a glass of milk and cookies for him on the kitchen table, be a nice kid and let’s see if the magic happens… but don’t be disappointed if you only get a chunk of coal.

All views, opinions or analysis expressed in articles are that of the author and do not represent the views of BUX. Neither BUX nor the author provide financial advice and these articles should not be construed as such.

You might also like