The Santa Claus Rally: What The Data Actually Tells Us

Happy Sunday everyone.

Every December, you'll hear talking heads on CNBC hyping up the "Santa Claus Rally." But what's actually behind this seasonal pattern?

I wanted to break down what the heck it is. 🎄

Let's dig in...

First, What Exactly Is It?

Yale Hirsch first identified this pattern in 1972, and it refers to a very specific window:

• Last 5 trading days of December

• First 2 trading days of January

• That's it - just 7 trading days total

The Numbers That Matter

Since 1950, this tiny window has packed a serious punch:

• Market rises 79% of the time (58 out of 73 years)

• Average gain: 1.3% in just seven days

• For perspective: Regular 7-day periods only rise 56% of the time

• Typical 7-day gain: A measly 0.2%

Even more impressive: Looking back to 1928, the S&P 500 has averaged a 1.7% gain and traded higher 78% of the time (70 out of 90 years) during this period.

Historical Performance Data (20y snap shot)

Here's the complete historical record of Santa Claus Rally returns since 1999:

Sourced - “What does Santa Claus have in store for the stock market?” (LPL Financial)

Today’s Sponsor (please click/check it out, I need good coffee <3)

Your Year-End Position Matters (stupid data factoid)

The rally's strength has a clear correlation with November performance:

• If markets are up YTD through November: 1.9% average December gain

• If markets are down YTD through November: 0.9% average December gain

The Warning Signs Myth

Wall Street has a saying "If Santa fails to call, bears may come to Broad and Wall." But the data tells a different story:

• Only 5 out of 12 negative Santa rallies predicted down years

• That's 42% accuracy - literally worse than flipping a coin

• Notable examples:

  • 1999: -4.0% rally preceded a -10.1% year

  • 2007: -2.5% rally before the 2008 crash (-38.5%)

  • But: 2004 (-1.8%) and 2016 (0.4%) saw positive years follow

What's Actually Driving This Rally?

Three main factors are at play:

1. Big Money Behavior

   • Year-end rebalancing wraps up

   • Tax-loss selling finishes

   • Institutional traders on vacation

2. Market Mechanics

   • Super low trading volume

   • Less big player participation

   • Fewer short sellers active

3. Psychology

   • Holiday optimism kicks in

   • Bonus money hits accounts

   • New Year investment mindset

Modern Market Reality

Today’s markets barely resemble 1972 when Hirsch discovered this pattern:

• Algorithmic trading now dominates (60-75% of volume) but hasn’t killed the pattern

• Global markets never sleep - U.S. holidays aren’t the trading breaks they used to be

• Tax-loss harvesting happens year-round through robo-advisors, not just December

• Yet the pattern persists: 2023’s rally matched historical norms (S&P 500 +1.58%, Dow +0.82%)

The Bigger Picture

The Santa Claus Rally is actually part of a broader seasonal strength that smart money watches:

• December is historically the third-strongest month, behind July and April

  • Averages a 1.6% gain since 1950

  • Posts positive returns 75% of the time

  • Performs even better in years when markets are up through November (+1.9%)

• The “January Trifecta” - three indicators pros track:

  1. Santa Claus Rally (last 5 + first 2)

  2. First Five Days of January

  3. Full January Performance (“As January goes, so goes the year”)

• When all three align positive:

  • Markets finish higher 90% of the time

  • Average yearly gain jumps to 18%

  • Last failed signal: 1990

Making Sense of Santa

The Santa Claus Rally isn't holiday magic - it's a well-documented pattern driven by institutional behavior, tax incentives, and market mechanics. While the 79% hit rate is impressive, smart investors view it as a seasonal tendency rather than a trading strategy.

Key takeaways from the data:

• The 1.3% average gain in 7 days is significant

• But it's more reliable as a market insight than a bearish warning sign

• Recent data shows the pattern persists despite modern market complexity

Here's what matters: Markets run on supply and demand. During these seven days, demand typically outweighs supply thanks to a perfect storm of year-end institutional moves, tax-related shifts, and yes, maybe a bit of holiday optimism.

Just don't bet the farm on Santa - even reliable patterns are never guarantees.

Stay Curious 🙂 

- John