Happy 50th Anniversary to the discovery of the Santa Claus rally. It's that time of year again: the Santa Claus rally. Like a lot of Wall Street mythology, this one has a lot of barnacles around it. Santa Claus rally: what it is The Santa Claus rally is a short rally that runs from the last five trading days of the year to the first two trading days of the New Year. Across that span, the S & P 500 posts an average gain of 1.3% since 1950. A 1.3% increase over seven days is much higher than the expected probability that the S & P 500 would increase by that amount over a seven-day trading period, so this is statistically significant. And it happens fairly often. According to one study, a Santa Claus rally has materialized in four out of every five years since 1950. Santa Claus rally: what it isn't Still, this is often taken as some kind of trading strategy. "It's not a trading strategy, it's an indicator!," Jeff Hirsch reminded readers of the Trader's Almanac a few weeks ago. Jeff's point: failure to rally in these coming seven days tends to precede bear markets or times when stocks could be purchased later in the year at lower prices. He should know. His father, Yale Hirsch, a friend of mine for many years, discovered and named the Santa Claus rally in 1972. This year is the 50th anniversary! It's also why the rally is so closely associated with Yale's now-famous couplet: "If Santa Claus Should Fail To Call, Bears May Come To Broad And Wall," (referring to the New York Stock Exchange location). Why is there a Santa Claus rally at all? Nobody knows, but there is no shortage of explanations: anticipation of new money coming into the market in January, optimism about the new year, end of year bonuses being put to work, lack of institutional trading which leaves the market to more optimistic retail traders, and even just traders anticipating a rally. All of this makes some sense, but it makes a simple assumption: that everything is relatively normal and there is no macroeconomic event that has everyone worried. That's not the case right now. Markets are obsessed with a recession in 2023. But here's an odd thing: Santa Claus rallies do occur during recessions. "The three largest Santa Claus rallies (2008-2009, 1974-1975 and 1973-1974) occurred during recessions, as did the worst end-of-year periods (1990-1991 and 2007-2008)," one study concluded ( https://smartasset.com/investing/santa-claus-rally-2020 ). So maybe just sit back, crack open the egg nog and hope for the best.
