Key Takeaways
- A ‘Santa Rally’ is the term used to describe the gains for the markets in December, with many believing it’s generally a good month for investors.
- Funnily enough it’s actually true, with the probably of a positive return for US large caps at a massive 77.9% from 1926 to 2020.
- So far this month the S&P 500 is down over 2%, so will we see Santa come to save the stock market in 2022?
With another year coming to an end, around now is the time that investors start to look for signs of the ‘Santa Rally.’ If you’ve not heard the term before, it’s one used to describe the stock market phenomenon that occurs during the last few days of trading before the Christmas holiday.
The funny thing is, it’s not just a theory. Statistics show that December has the highest probability of a positive return over every other month of the year, and by a fair margin. It’s got some ground to make up if we’re going to see this hold true this year, with the S&P 500 down 2.11% so far this December.
So when can we expect to see the Santa Rally take off and what should investors do to take advantage of it?
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The Santa Rally is real
It sounds kind of made up. The idea that stocks make gains at the end of the year on a regular basis seems like one of those things you hear, but when you dig into the data it’s really not the case.
Not so with the Santa Rally. Investment manager Schroders looked into the performance of US large cap stocks’ total return throughout the year from all the way back in 1926.
They looked at the number of times the market rose in each month over this time frame, and the number of times the market fell. This then gave an overall percentage of rises to falls, or a probability that the market would go up or down in a given month.
The months fell within a probability range of between 51.6% and 77.9%. The month with the lowest probability of making gains is September, with long term average monthly performance actually into negative territory at -0.69%. This shows that even though the market goes up slightly more often than down, the down moves have been more significant than the upwards ones.
So, September’s not great.
On the other end of the spectrum, December has the highest probability of gains at 77.9%, with an average monthly performance of 1.60%. The interesting thing is that this is well above the second highest probability, which is November at 67.4%. Arguably, even this could be down to the beginning of the Santa Rally.
Beyond the end of the year trend, March and April are the next most likely to see a rise, with a probability of 65.3%. The rest of the months all fall around the 60% range.
With all that said, which month has the best average performance? Well that honor goes to July, with a probability of a positive return of 61.1%, its average performance is a whopping 1.87%. It means that historically when the market does move in July, it moves big.
Why does the Santa Rally happen?
Honestly, there’s no specific reason why stocks should go up at the end of the year. One theory is simply that we’re all in a better mood. There’s a sense of optimism in the air during this time of year and we’re all looking forward to spending time with our families and enjoying the holidays.
Over short periods of time, feelings and emotions (or ‘investor sentiment’ to use a slightly more technical term) are powerful drivers of price movements and can’t be ignored.
Other theories are that many employees receive Christmas bonuses, which increases the demand for stocks which can bid up prices with sufficient volume. Spending in general could also help. It can be a time of year where we become acutely aware of how much we’re spending at various stores.
This spending can lead investors to think about how much money the retailers are making, which can lead to believing that investing in those companies could be a good idea.
Many professional investment managers and investment analysts will also take vacation time over the holidays. With less scrutiny on stocks there’s less likely to be major moves made by investment houses and funds, not to mention the fact that the markets are often closed at various points over the holiday period.
Lastly, it can be a self fulfilling prophecy.
If investors expect there to be a Santa Rally, they buy in on the expectation of rising prices. This will cause more demand for stock, which will increase the prices, which will then cause more investors to believe the Santa Rally is on and look to buy in as well.
The positive price spiral can mean prices go up, simply because everything thinks prices are going to go up!
Will we see a Santa Rally this year?
Santa’s got a big task ahead of him this year. It’s no secret that the stock market has had a terrible year and the first half of the month hasn’t been great.
The S&P 500 is down -2.11% over the first two weeks of the month, so we’ll need to see a sizable turnaround to finish the month in the green. That’s particularly challenging given that October and November were very good for the US market.
As any investor knows, markets can’t just go up and to the right forever and even in the biggest bull markets will retrace their steps at various times throughout the year. Three consecutive months of gains at a time when the economy is sputtering and inflation remains high is a tall order, to say the least.
How can investors take advantage of a Santa Rally?
Ok so you’re a believer in the power of Santa, and you want to get in on the action. Sure, you can try, but timing the market is a notoriously tough call to make. Almost any professional investment manager or financial advisor will tell you that it’s time in the market, not timing the market.
What this means is that we have no way to know when the big gains are going to come. Stock markets can turn on a dime and offer up major returns before you have time to hit that buy button.
It’s why a long term strategy is the best way to go for most investors.
But what to invest in? If you’re not sure, a broad spectrum option is probably the best way to go. Our Active Indexer Kit is a great example. This ETF-based Kit uses the power of AI to invest in large cap and small cap ETFs, plus a specific weighting to technology ETFs.
Our AI analyzes the makeup of the Kit each week, and then automatically rebalances it based on its projections.
And if you’re worried that the Santa Rally might not play out, you can add Portfolio Protection to this Kit as well. For this, our AI analyzes the Kit’s sensitivity to risks such as interest rate risk, market risk and even oil risk, and then automatically implements sophisticated hedging strategies to help guard against them.
It’s the kind of strategy that’s usually only on offer to high net worth individuals, but we’ve made it available to everyone.
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