U.S. Stock Bulls Believe in Year-End 'Santa Claus Rally'

Wall Street hopes that the stock market will deliver a late gift to investors amid a volatile December.

Monday kicks off an annual event known as the “Santa Claus rally” when the stock market tends to climb into the end of the year. Since 1969, the S&P 500 index has averaged a gain of 1.3% over the seven-day “Santa Claus rally” period, which includes the last five trading sessions of the year and the first two trading days of the new year, according to The Stock Trader’s Almanac.

“Whether optimism over a coming new year, holiday spending, traders on vacation, institutions squaring up their books -- or the holiday spirit -- the bottom line is that bulls tend to believe in Santa,” Ryan Detrick, chief market strategist at LPL Financial, wrote in a note.

Major U.S. indexes are sitting on double-digit gains in 2021, buoyed by a strengthening economy, supportive monetary policy and government spending. However, investors are now contending with a host of worries including stubbornly high inflation, tighter policy from central banks, stricter travel curbs around the world brought on by the omicron variant and growing concerns on an economic slowdown.

Markets have whipsawed since the omicron variant was found in South Africa in late November, which briefly triggered a global selloff. Since then, stocks have recovered those losses to trade at record highs after encouraging reports about the economic risks posed by the omicron variant.

Holiday Spirit

The S&P 500 has seen a Santa rally of 1.3% on average since 1969

Source: BloombergNote: Santa rally includes last five trading sessions of year and first two trading days of new year

This has been one of the S&P 500’s most volatile Decembers since 1987, according to data complied by Bloomberg. The benchmark index’s average daily move has been 1.1% this month through Thursday, the fourth-largest for any December in more than three decades behind 2018, 2008 and 2000.

But a so-called Santa rally could still emerge as seasoned market veterans wait for bigger bargains following the recent selloff.

The first half of December is typically weaker as tax-loss selling dominates trading. Then in the second half of the month institutional investors snatch up bargains when retail investors leave for the holidays. When they aren’t buying stocks, that signals something could be amiss in the stock market,according to experts.

“Considering the bear markets of 2000 and 2008 both took place after one of the rare instances that Santa failed to show makes believers out of us,” Detrick explained. “Should this seasonally strong period miss the mark, it could be a warning sign.”