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Santa Claus Rally, Fact or Fiction?

"The real rally could come not from Santa Claus, but from Federal Reserve Chairman Jerome Powell, who will decide how much longer to hike interest rates." - Vance Cariaga, financial journalist

The term "Santa Claus rally" is a bit misleading. The phenomena refers to the week after Christmas and the first two trading days of January.

Semantics aside, inquiring minds would like to know...

Is the Santa Claus rally a real thing?

What does it mean for stocks?

The below chart from Carson Investment Research indicates December has historically been a solid month for the S&P 500...

Source: Carson Investment Research, @ryandetrick on Twitter

The above graph shows monthly returns for the S&P 500 since 1950 (beige), past 20 years (blue), past 10 years (green), and mid-term election years (dark blue). December returns have been a shade lower during the past 10 & 20-year periods, but slightly higher in mid-term election years.

According to Carson Research, when stocks are down for the year heading into December, stocks have been higher in December 8/9 times.

Drilling down a bit further, there seems to be some divergence between S&P 500 performance early in December vs. late in December...

Source: Bespoke Investment Group

The above graph shows S&P 500 performance from 1983-2021 (blue) and the past 10 years (green). Notice the downward bias during the first ~15 days of the month vs. the last 15 days. Could a less aggressive Federal Reserve add fuel to this seasonal tailwind?

Sector-level returns for the S&P 500 and Nasdaq back up this intra-month December quirk (1983-2021)...

Source: Bespoke Investment Group

The above graph breaks down sector performance for the S&P 500 & Nasdaq through the first 15 days of December (left side) vs. the last 15 days. Returns were higher and more likely to be positive, both at the sector & index level, the last half of December!

How can this oddity hold up over time?

Some say it's tax-related adjustments. Others point to holiday & new year optimism (nobody is going to miss the stock/bond markets of 2022).

No one knows for sure.

In my opinion, the Santa Claus rally is a quirk in human psychology; if enough people believe it to be true, it can become reality.

Wishing everyone a safe & wonderful holiday season!

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