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With the holidays around the corner, it's that time of year to break down the Santa Claus rally – a rise in the stock market that occurs during the last 5 trading days in December and the first 2 trading days in the following January.
What is the Santa Claus rally? (00:00:08)
Despite the folksy name, the Santa Claus rally is a powerful indicator that can actually help predict whether the New Year will end in the green – or the red. The term was coined by Yale Hirsch, writing for the Stock Traders' Almanac way back in 1972.
"The Santa Claus rally that we talk about, that's actually the last 5 days of December, and the first 2 days of January," Yahoo Finance's Jared Blikre said.
Hirsch discovered that this stretch of time over the sleepy holidays tends to be overwhelmingly positive for stocks. And over the last three decades, these seven days have been green nearly 80% of the time, with an average gain of 1.3% in the S&P 500 (^GSPC).
Stock market trends (00:00:48)
Why do stocks tend to drift higher over the holidays? It's bonus time in Corporate America, and in general, the seasonal gift-giving lends itself to the bulls. Markets tend to be illiquid, as traders abandon their desks, and the drum beat of news quiets. No earnings, no e-con reports. Even fed officials quiet down to leave the markets in peace.
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But it's not just the juicy, reliable returns that attract investors' attention. The Santa Claus rally is a powerful indicator, which, when combined with two other January-based indicators – can reliably predict returns for the remaining eleven months of the year.
"And then we have something called the January Effect in the first five days of trading. Suffice to say that January is a very important bellwether for the entire year," Blikre said.
Indeed, if you dial back to January this year, it was overwhelmingly positive. But 2022 was such a disaster for investors that it was easy to write off the burgeoning bull market.
It’s important to remember that the tremendous 2023 rally got its start early on twelve months ago with those fateful seven days, when stocks jumped 2.4%.
Outlook for 2024 (00:01:53)
What's in the cards this year? Let's leave it to the words of Yale Hirsch, writing five decades ago: "If Santa Claus should fail to call, bears may come to Broad and Wall."
Here’s hoping for a green finish to the year to kick off another bull run in 2024.
Video Transcript
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JARED BLIKRE: With the holidays around the corner, it's a time of year to break down the Santa Claus Rally. Despite the folksy name, the Santa Claus Rally is a powerful indicator that can actually help predict whether the new year will end in the red or the green. The term was coined by Yale Hirsch writing for the "Stock Traders Almanac" way back in 1972.