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It’s that time of year again. Friday is the official start of the Santa Claus rally. First identified in 1972 by Yale Hirsch, the founder of the Stock Trader’s Almanac, it is defined as the last five trading days of one year and the first two trading days of the following year, and has been good for an average gain of 1.3% on the S & P 500 since 1950. That may not sound like much, but as Ryan Detrick from Carson Group has noted, no other consecutive seven-day period produces higher results. And it is up almost 80% of the time. Strange December Why does this happen? December is a seasonally strong month (usually second or third strongest), but the gains are lopsided. All the gains tend to happen in the second half of the month: I’ve heard many explanations for this phenomenon over the years, including 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. What the Santa Claus Rally is, and isn’t Over the years, Jeff Hirsch of the Stock Trader’s Almanac has repeatedly told me the key to understanding the Santa Claus rally is that it is not a trading strategy, it is an indicator. It’s most important use as an indicator is what happens if the S & P is negative during this seven-day period. “Santa’s failure to show tends to precede bear markets, or times stocks could be purchased later in the year at much lower prices,” Hirsch writes in the Stock Trader’s Almanac. Fortunately, a negative Santa Claus rally period doesn’t happen very often, only 12 times since 1969 (less than 25% of the time). In the years when the Santa Claus period is negative, the S & P is up an average of only 5.0%, versus an average gain of 9.1% in all years. Don’t be lulled into thinking this is some kind of infallible predictor of whether the S & P will be up or down in the coming year. It doesn’t say that. The Santa Claus rally period was negative in 2004 and 2015, for example, but the S & P was up both years, though not by much (3.0% in 2004, 9.5% in 2015). Seasonal strength continues Remarkably, we are still in a seasonally strong period. This is still the beginning of the best six months of the year period (November-April) and the best three consecutive months of the year period (November-January). This is also the end of a pre-election year, which is the strongest of the 4-year cycle. Hirsch notes that the market in these years will “often sees a new high in December and frequently on the last trading day of the year.” Election years with sitting president are typically strong If this isn’t enough seasonality for you, check this out for 2024: in an election year when a sitting president is running (2024), the market tends to outperform. In those years, the S & P 500 averages a gain 12.8% since 1949, Hirsch says. When there is no sitting president running, the S & P averages a loss of 1.5% on average for the year. You can see this very clearly in this chart: The common explanation is that: 1) markets are stronger with a sitting president because a sitting President can pull levers to help the economy, and 2) markets tend to be weaker with no sitting president because of increased uncertainty around economic outcomes. “2024 has that power of incumbency going for it,” Hirsch says.
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