Ho, Ho, Ho! It seems winter’s premature arrival this year prompted Santa to spread his joy early after the late-November lows. A Santa Claus rally describes the tendency for the stock market to rise in December and the first few trading days of the new year.
The Santa Claus rally was first defined in the 1972 Stock Trader’s Almanac by Yale Hirsch and used to describe the phenomenon of a sustained increase in the stock market during the holidays. According to The Wall Street Journal, historically, the S&P 500, the Dow Jones Industrial Average (DJIA), and the Nasdaq Composite have risen about 80% of the time during the Santa Claus rally period.
There is no generally accepted reason for what causes Santa Claus rallies. The most likely causes include:
- Institutional investors/traders tend to be on vacation during the last week of December, resulting in retail investors driving the stock market, who tend to generally be more bullish
- Investors/traders purchasing in anticipation of the January Effect, which is a hypothesis that there is a seasonal anomaly causing stock prices to increase in the month of January
- A slowdown in tax-loss harvesting, which has a deadline of December 31st
- Optimism over the coming new year
- Holiday spending
This year, Federal Reserve (Fed) Chairman Powell delivered a shot in the arm by lowering rates by 0.25% last week. Since stock investors are forward-looking, current interest changes influence stock prices today as investors anticipate future interest rate impacts, which could take months. Lower interest rates accelerate the economy, which is accretive to company earnings.
Holiday spending is up. Foot traffic at stores, as well as online, and dollars spent have exceeded many projections. Forecasts were mainly positive with slight gains over 2024. So far, we’ve seen excited consumers willing to win the hearts of family and friends with material goods. One side note on consumption: it looks like consumers are veering towards domestically manufactured goods or at least curtailing foreign purchases. September’s trade deficit, though a bit dated due to the shutdown, was announced on December 11th, indicating the lowest trade deficit since mid-2020, which corresponded to the COVID economic halt.
Though investor sentiment is high, interest rates are supportive, and holiday spending is exceeding expectations, we can’t guarantee Santa will spread his cheer each and every year. The success of your financial plan is dependent on a long-term, disciplined approach to investing, not short-term hopes or a magical sleigh rider. Whatever Santa may bring for us in 2025, know that we will be here to help guide you through it. Happy Holidays!
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