A Reason Investors Should Believe in the Santa Claus Rally

Even if you don’t believe in Santa Claus, the numbers say you should believe in the Santa Claus Rally.
The words “Here comes Santa Claus” get investors just as giddy as it does the children nestled snug in their beds. Or at least they should.
Snicker all you want at the so-called “Santa Claus Rally.” But the numbers prove it’s more real than Jolly Old St. Nick himself.
Since 1950, the seven trading days that surround Christmas have resulted in an average gain of 1.5% in the S&P 500. That includes the final five trading days of the year and the first two in January.
In no year since 2007 have stocks fallen during that short stretch. In fact, since the turn of the century stocks have only declined twice during the Santa Claus Rally period.
The reasons behind the Santa Claus Rally aren’t totally clear. I imagine it’s some combination of Christmas shopping fervor giving way to the hope of great things ahead with the start of a new year. But the trend is irrefutable.
Rallies of 1.5% over seven trading days are nothing remarkable. Heck, the S&P shot up 4.7% last week alone. But when such mini-rallies occur as regularly as they do over the same seven-day stretch – dating back more than six decades – it’s worth paying attention.
It’s also worth paying attention in case stocks DON’T rally over the next seven days.
When the Santa Claus Rally fails to materialize, it’s usually the sign of an imminent market crash – or at least a sustained down period.
Only three times in the last 21 years have stocks fallen during the Santa Claus Rally period. Here’s what happened after those rare declines:
1999 “Santa Claus Rally” Losses: -4%
What came next: The dot-com bubble burst. On Jan. 14, 2000, the Dow Jones Industrial Average began a 33-month, 37.8% slide that didn’t relent until the midterm elections in October 2002.
2004 “Santa Claus Rally” Losses: -1.8%
What came next: The S&P 500 declined 2.1% in the first three months of 2005 and didn’t fully recover until May of that year. This Santa Claus down period was more an aberration than sign of things to come: escalating terror in the Middle East at the height of the Iraq War grounded Santa over the holidays.
2007 “Santa Claus Rally” Losses: -2.5%
What came next: Epic disaster. The subprime mortgage crisis was just getting underway, and stocks were beginning to fall. By February 2009, the S&P 500 had lost more than 52% of its value. The market didn’t fully recover until last year.
Chances are, your portfolio will be the furthest thing from your mind over the next two weeks. And rightfully so. You’d rather be spending time with your family, singing Christmas carols and ringing in the new year than checking on how your stocks are performing.
But it’s worth at least a peek.
If stocks do fall flat over these next seven trading days (starting tomorrow), history tells us that’s not a good thing. It may not necessarily be a harbinger of the next dot-com bubble or subprime mortgage crisis. But generally, when Santa doesn’t leave stock-market returns in investors’ stockings, it doesn’t bode well for the months to come.
Fortunately, the stock market rarely falls this time of year. Whether that’s due to some tangible market force or mere holiday hocus pocus is unclear.
What is clear is that investors should believe in Santa Claus. Let’s hope he makes his way down the chimney one more time.

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