‘Tis the season for the stock market’s typical ‘Santa Claus Rally’ – That’s Rich!

CLEVELAND, Ohio – ‘Tis the season for some strong investment returns — the period from Christmas Eve through the first couple of days of January.

Historically speaking, these are good times.

In fact, no seven-day market period on the calendar consistently does as well.

“The last five trading days of the year and the first two trading days of the next year are defined as the Santa Claus Rally,” explains Greg Harmon, a professor of banking and finance at Case Western Reserve University with experience as an investor and as a banking executive.

“If you look at the statistics over the last 70 years, those seven days average 1.4% gains. And there have only been 15 times where there has not been a positive return.”

This means the Santa Claus Rally begins on Christmas Eve, just as a lot of elves are busy wrapping gifts or preparing for holiday gatherings, and while offices have emptied out. With this year’s calendar, it runs through Tuesday, Jan. 5.

Like Santa Claus himself, there is a bit of a mystery.

“The rest of the months have more random (returns),” Harmon said. “No one knows for sure all the reasons for this.”

One theory is that the holiday season may typically increase optimism about the coming year. But there also are some concrete changes in the normal trading patterns during this period.

“It’s typically very light trading the last five days of the year,” Harmon said, noting that most senior executives and traders are off work then. “It’s the junior people who are left on the desk.”

Some of the trend could be the result of people timing their trades for one year or the next because of tax reasons. Large funds may be doing some rebalancing.

“This seven-day period is more likely to be positive than any other seven-day combination,” Harmon said. “What does this mean? If you look at a 254-day trading year, taking out the weekends … the seven-day period for the Santa Claus Rally is No. 1 for all possible combinations.”

The big caveat, however, is that this is a trend, and absolutely not a guarantee. As Harmon reminds, the market did drop 15 times in the last 70 years during this holiday period.

David Gottlieb, a financial adviser in the Pepper Pike office of Edward Jones Investments, said there tends to be more volatility during the holiday period.

“We try to get past that. It ends up being a market timing issue and we try to not get caught up in market timing,” Gottlieb said.

The other factor coming up this January will be a change in the White House, another timing issue Gottlieb said he tries to get beyond in talking to his clients.

“If I managed based off presidents, you’d never make money,” Gottlieb said. “No matter who is in there, we have to find markets that will perform well. … We have to focus on the long term; that’s all short-term talk.”

Jordan Rodriguez, a certified financial planner for Wernick Spear Wealth Managers in Beachwood, said there are reasons to believe the Santa Claus Rally could be helped along this year with the closing out of what has been a volatile but overall positive year for the market.

“There is still a record amount of cash sitting on the sidelines,” Rodriguez said, noting trillions of dollars that are being held by big investors and small. “That’s a great reason to think the stock market could go up.”

Additionally, Rodriguez said the market could get a push from the fund managers who had underperformed during the year of much uncertainty, but who may now become more active in an attempt to catch up in December to show a better performance for the full year.

As for the typical Santa Claus Rally, the more time in the rally the better, CWRU’s Harmon noted.

Do your analysis each year ahead of the holidays and “start on Christmas Eve,” Harmon said. “You have to be in it for the whole (Santa Claus Rally) period if you are going to get that 1.4%.”

Rich Exner, data analysis editor, writes cleveland.com’s and The Plain Dealer’s personal finance column – That’s Rich! Follow on Twitter @RichExner.

Email questions and suggestions to rexner@cleveland.com. Include your hometown and first name for publication. And to help me sort through the clutter of my email box, try to remember including “That’s Rich!” in the subject of the email.

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