In the world of investing, the festive season can often be synonymous with opportunities and growth.
In fact, Christmas day tends to see stock markets rise — a phenomenon commonly known as the Santa Claus rally. But is it really a thing? Is Christmas the best time of the year for investors?
What do we mean by ‘Santa Claus rally’?
The term ‘Santa Claus rally’ is used to describe a sustained increase in the stock market during the festive season. Typically, the rise in share prices occurs in the last week of December, through to the first trading days of January.
Evidence shows that markets have benefited from an end-of-year lift in 34 of the past 45 seasons[1].
And, since 1987, shares across global markets managed to rise 78.1% of the time in December, with stock prices increasing 1.7%[2] on average.
Do stock markets always go up during Christmas?
So, share prices are more likely to go up in December — but do they always rise? Are there any exceptions? Of course there are! Christmas hasn’t always been a good period for investors; take December 2018, for example, when stock markets didn’t rise (quite the opposite, actually).
It was one of the worst months for markets as global stocks fell 7.2% in December 2018[3]. The Santa Claus rally is something that will happen from time to time; but, as an investor, it’s important to remember that markets are sometimes illogical and unpredictable, meaning you shouldn’t expect prices to rise every December.
If anything, 2018 reminds us that nothing’s certain in the markets, and investment decisions shouldn’t be based on past trends and performance.
What are the causes of the Santa Claus rally?
There are several theories behind the Santa Claus rally. One theory is based on investor psychology, suggesting that the holiday season may put investors in a good mood, which is known to drive more buying than selling (who knew the holiday spirit could influence investment decisions?). Another being that investment managers may be rebalancing their portfolios before they go on holiday.
What are the dangers of the Santa Claus rally?
The main danger of the Santa Claus rally is that it can give investors a false sense of security in December, pushing them to buy without really doing any research or analysing market data. In other words, the Santa Claus rally could urge investors to take ill-considered risk — and this could have serious repercussions. If everybody buys during Christmas with no elaborated reasoning behind the purchasing, then we could end up with a bubble ready to burst at any time.
Another danger with the Santa Claus rally is that it focuses on the short-term and, if anything, investing should be approached with a long-term vision. It’s all great if you manage to make profits in December — but what about in 10, 20, or 30 years?
When you’re investing, it’s important to think about the long-term and look at the bigger picture. Whatever happens next December may not matter much in a number of years. It’s all about perspective and, as an investor, you’ll need to work with the right lenses.
At Wealthify, we make sure to look far ahead when picking your investments and building your portfolio, because we believe investing is a marathon — not a race.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
Please remember the value of your investments can go down as well as up, and you could get back less than invested. Past performance is not a reliable indicator of future results.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
References:
1. https://markets.businessinsider.com/news/stocks/santa-claus-rally-stock-market-new-highs-into-year-end-2019-12-1028779965#
2. https://www.schroders.com/en/uk/adviser/insights/markets/santa-rally/
3. Data from Bloomberg
