What is a Santa Rally?
Author: Stuart Fry
What is the Santa Rally, why does it occur and does it really exist?
I have recently taken a more active role in the management of my pension and at this time of the year I find myself undecided in my festive investment approach:
Should I temporarily come out of the stock market during the December quiet trading period? Most people are taking a break meaning share prices are likely to drop.
Should I remain invested and join the so called “Santa Claus Rally” and come out of the market after benefiting from the December Effect?
Should I leave my long term investments untouched and ignore any short term volatility in the markets?
I am not a Financial Advisor so nothing in this article should be taken as financial advice. The Santa Rally phenomenon is interesting and the financial press is flooded with it, so I thought I would share with you my festive findings…
The “Santa Rally”
Firstly, the term “Santa Rally” is used quite generically by the financial press and others to describe any increases in the stock market during the December period. However, it is generally agreed that the period in question is the week between Christmas and the New Year. Many also believe that the success of this one week period dictates how buoyant the markets will be in the following year.
Why does it occur?
There are many (unproven) explanations for the “Santa Rally” including:
An increase in share purchases in December to escape higher prices in January ; the surge early in the New Year is known as the “January effect”
Stock market activity is so low, it doesn’t take much interest for market makers to move their price
Fund Managers rebalancing their portfolios
General happiness around Wall Street and other Financial
Centres People investing their Christmas bonuses
All the pessimists are on holiday
Does it really exist?
Amazingly, research by the S&P Dow Jones Indices (the company behind the S&P 500 index of American shares) has shown that on average, December has been four times more profitable than the average month across the world’s major developed markets (including the UK, US, Europe and Hong Kong).
I won’t tell you what I have decided to do in terms of my investments; I’ll let you do your own research and reach your own conclusions.
