Is the Santa Claus Rally fact or fiction? Here, several market historians and forecasters look at this seasonal trend which suggests that, historically, the market performs particularly well before and after the holiday period. Here are some comments from Sharon Parker, Jim Dines, and Jim Stack.
"Stocks posted
strong gains recently, buoyed by stronger-than-expected economic data, and
perhaps some holiday spirit," says Sharon Parker, in the
Factor/Trend Alert.
"The holiday feeling seems to be alive and well on Wall Street. The last month of
the year has consistently seen the best performance for stocks since 1950. In fact,
the S&P 500 has jumped an average of 1.8% higher in December over that stretch—and
the index also posted gains for the month 78% of the time dating all the way back
to 1942. So if you have not done so already, you better start making that
holiday list, and be sure to check it twice—and stay tuned for what history says should be a
pleasant upward move in stocks this month."
Jim
Dines, editor ofThe Dines
Letter, adds, "Popularly known as the Santa Claus Rally, a short and sweet
rally for traders has been observed in the S&P 500 during the final five
trading days of the year, plus the first two in January. This year's Santa Claus
rally would be expected from December 27 through January 5. The average rally
over these days is 1.7%. Meanwhile, over the past 58 years, from November
through January, the market has seen an average rally of 9.85%. Thus, assuming
that the November 11 low at 9,737 holds, a projected rally toward around Dow
10,697 is indicated for the period between December 2003 and January
2004."
Jim Stack, editor ofInvesTech Market Analyst,
notes, "Many Wall Street truisms are based more on fantasy than
fact. Not so with the Santa Claus Rally. In terms of seasonality, the
two-month period surrounding Christmas is without dispute the strongest pattern
of the year. And this is one truism that is backed by the weight of historical
evidence. Typically, the rally will begin in early December, but it isn’t until
mid-month that the pre-holiday spirit really kicks into overdrive. We caution
that Santa doesn’t always deliver. In fact, the Grinch has prevailed over
the past two years and last year’s loss 9.5% was the worst since
1931. All the same, we believe several factors contribute to seasonal strength
in December and January:
-
The holidays are the strongest retail period of the year.
-
Investors and corporations usually make year-end contributions to IRAs and pension plans.
-
Financial forecasters generally issue upbeat forecasts for the new year.
-
It seems natural that the holidays might lift investors’ spirits.
-
And this year there’s an added reason…after two years of failure, it’s about time for this factual truism to reassert itself.
"Certain sectors have shown increased seasonal strength and historically outperformed over this two-month period. Consumer Discretionary ranks among the top seasonal performers. That’s only logical in light of consumer spending around the holiday time. Financials also do well. Banking stocks and Brokers seem to consistently end the holidays on a high note. Technology stocks are also a seasonal favorite. Industrials—in particular, Equipment and Services, Packaging and Building Materials—have performed well around year-end. Other standouts are Healthcare Providers and Medical Products, which have logged gains in eight of the past 11 years. Moreover, small-cap stocks have outperformed their large-cap counterparts during the December-January period. In fact, the small-cap Russell 2000 Index has registered gains in 10 of the past 11 holiday seasons—last year was the sole exception. Overall, the historical and technical odds are in our favor as this year winds to a close. We expect a healthy Santa Claus Rally to offer opportunity to enjoy the holiday season."
