Financial Professionals

January 9th, 2023

What Happened to the Santa Claus Rally?

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The so-termed “Santa Claus Rally” says that stocks have a high likelihood of rallying in the final trading days of the year (after Christmas), often extending into the first couple of days of the new year. The statistics on this seasonal pattern vary depending on who you ask and what timeframe is being used. Generally speaking, though, the consensus is that stocks have a greater than 60% chance of going up during this period, based on history.1

But Santa never arrived in 2022.

Instead, U.S. stocks gave up some of the strong gains posted from mid-October through the end of November, ending the year with a whimper.

The Santa Claus Rally Didn’t Happen in 2022

Source: Federal Reserve Bank of St. Louis2

The lack of a late December rally has some arguing that it could be a sign of things to come in 2023. Part of the Santa Claus market lore is that a rallying market at year-end, and early in the new year, has been a good predictor of the gains to come. But an investor needs only a look back to 2021 to see the fallacy in this argument. During the 7-day Santa Claus rally period of 2021, the S&P 500 notched a solid +1.4% gain. 2022’s bear market started the next day.

Now that we’re in a new year, some investors are looking for signs that the “January Effect” is taking hold. This seasonal quirk says that stocks – and in particular smaller, value stocks that experienced selling pressure in the previous year – tend to rally in the early days of January. The causes for this supposed rally range from hopefulness in a new year to investors repurchasing stocks following year-end tax loss harvesting.

Next up on the investment calendar is the ‘Sell in May’ adage, which says that investors should ditch stocks at the end of April, wait on the sidelines until Halloween or some arbitrary date in the fall, and then reinvest in time for the aforementioned Santa Claus late-year rally.

Investors shouldn’t buy into any of this.

In my view, the Santa Claus rally, January Effect, and Sell in May are all just market-timing strategies dressed up as seasonal, statistics-driven investment approaches. But any adage or rule that suggests investors should be getting in and out of stocks over weekly or monthly time frames is not only wrong, in my view, but also harmful to an investor’s long-term return potential.

Stocks have delivered annualized returns of over +10% since 1926, which includes the Great Depression, high inflation during the 1970s, the 2008 Global Financial Crisis, and every other bear market and correction over that time. Trying to dance around seasonal quirks likely means missing significant amounts of the upside needed to capture that total return.

In my book, The Little Book of Stock Market Profits, I wrote: “Over the years I have yet to find a successful investor who obtained his or her returns through market timing…Active investment strategies can be developed that outperform the market over time – but engaging in behavior that borders on day-trading, because of what day is on the calendar, is ill-advised.”

In the years since I wrote that book, my opinion hasn’t shifted one bit.

Bottom Line for Investors

In the financial media, I have seen reputable pundits and even financial institutions still leaning into seasonal adages like the Santa Claus rally and the January Effect. But prudent investors should not try to time the market by season or any arbitrary date on the calendar. That’s because stocks don’t follow calendars, which means fundamentals-focused investors shouldn’t follow them, either.

Disclosure

1 Fool. 2022. https://www.fool.com/investing/stock-market/basics/santa-claus-rally/

2 Fred Economic Data. January 3, 2023. https://fred.stlouisfed.org/series/SP500


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