• The US stock markets’ return in the final week of the calendar year is significantly ahead of average
• The Dow has historically risen 77% of the time, between December 26th and January 2nd
• There are well-researched ideas around psychology as well as US cash flows that explain the phenomenon

As we enter December, we thought it would be interesting to highlight a slightly unusual market phenomenon: The Santa Rally. This is far from an exact science and different people will describe it differently, but the general theory is that stock markets rise in the last weeks or two of the calendar year.

In terms of data, the US stock market has averaged +1.3% between December 24th and December 31st over the last 70 years and has occurred in a whopping 75% of the years studied from 1950 to present day. Other studies on the Dow show that it has risen 77% of the time between December 26th and January 2nd going back to its creation in 1896, averaging 1.5%. That is quite a significant outperformance over the average six-day return throughout the rest of the year of 0.2%.

Below, I have festively charted the US and UK main markets in the 10-day window leading up to New Year. Over the last 5 years, they have gone up 60% of the time so it must be a thing… right? 

   

Why does it happen?

There are a few things at play here and no, Santa Claus isn’t one of them. Firstly, there’s the psychological factor of the holiday season. Quite simply, investors are typically in a better, more positive mood during the Christmas period and in anticipation of the New Year which boosts market sentiment. This translates into improved investor confidence and thus stock market gains. Secondly, and more scientifically, in the US, bonuses are usually paid at the end of December, which does mean there is a sudden inflow of cash, leading to more capital entering the market and driving prices up further.

The pension contribution deadline is also at the end of the calendar year in the US, so that is another cause of increased investment into the stock market. Lastly, it’s all a bit self-fulfilling. It’s been a talked about trend for so many years now that if enough investors believe it will happen then their actions and ‘FOMO’ create the rally.

Bowmore portfolios

The Santa Rally is a fun idea but does not have enough statistical evidence backing it to influence any of our investment decisions – it’s also a bit too random in terms of what years it happens and what years it doesn’t. That being said, the US remains our largest geographic weighting within our Equity bucket, and it certainly wouldn’t be the week to unwind that. For a bull investor, “it’s the most wonderful time of the year”.

The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance.