SANTA CLAUS RALLY: MYTH OR REAL INVESTMENT OPPORTUNITY

Every year, as December draws to a close, Wall Street begins to whisper: is a "Santa Rally" coming? This term refers to the seasonal rise in the US stock market at the end of the year—usually the last five trading days of December and the first two days of January. They say there's a particular sense of optimism before the New Year, with stocks rising amid the Christmas rush and low liquidity. Let's explore how true this is and what the statistics say.

The "Santa Rally" was first described by financial analyst Jal Hirsch in 1972. Since then, a significant body of data has accumulated. According to Stock Trader's Almanac, during the last five days of December and the first two days of January, the S&P 500 gained an average of about 1.3%. And in almost four out of five cases (79%), the index actually rose during these days. This means that, statistically, over the decades, this effect has occurred more often than not.

However, looking more recently, the picture is more modest. Over the past 20 "seasonal rallies" (an average of one per year), the S&P index rose in only 13 of 20 cases, with a total gain of about +0.6%. This means that in roughly every third year, the Santa Rally effect was either weak or nonexistent. It's also worth noting that consecutive "holiday flops" have been very rare: historically, only 1993-94 and 2015-16 saw two consecutive years without a Santa Rally.

The Santa Rally is sometimes compared to the "January Effect," but they are different phenomena. The "January Effect" is the observed increase in stock prices in January as a whole. It is most often explained as follows: in December, investors sell off unprofitable stocks for tax deductions, and after the New Year, they return to the market (this especially applies to small-cap stocks). The Santa Rally, on the other hand, affects a very short period: the last trading days of December and the first few days of January. Simply put, the January Effect is the overall surge in January, especially for small companies, while the Santa Rally is a short-term surge in major indices on the eve of the holidays.

It's important to understand that the Santa Claus Rally most often manifests itself in indices rather than individual stocks. This is why many investors use this period not for active trading, but to carefully increase their exposure to index instruments—such as S&P 500 or Nasdaq ETFs. This approach reduces the risk of picking a single stock incorrectly and allows them to participate in the overall market movement if the holiday effect does materialize.

Looking ahead to 2025, there are grounds for optimism. The S&P 500 has already gained more than 15% for the year (its third consecutive gain in the top 10 percent range). The Federal Reserve has cut rates three times, and November inflation data came in softer than expected. Taken together, this could provide a green light for market growth. For example, Reuters notes that the Fed "executed a rare 'dovish-hawkish' reversal" by lowering rates, but at the same time, growing concerns about the situation in the AI ​​sector could hinder the Santa Rally. That is, as long as economic data remains favorable and conflicts do not escalate, investors are hoping for moderate growth in the New Year. It is believed that positive sentiment could be supported by news of declining inflation (it slowed more than expected in November) and the technology sector (the Magnificent Seven ETF, which reflects the Big Seven tech leaders, rose by approximately 0.8% on the eve of the rally).

But there are risks, too. Any hawkish comments from the Fed, liquidity problems, or escalating geopolitical tensions could negate the seasonal effect. Reuters warns that the "shadow of AI worries" threatens the Santa Rally. In other words, a holiday rally is possible this year, but much will depend on the macro and geopolitical environment.

An interesting detail that's rarely discussed: historically, the absence of a Santa Claus Rally has often been seen as a warning sign for the market. Stock Trader's Almanac analysts noted that in years without a Santa Claus Rally, the following year often began with increased volatility or corrections. Therefore, for some investors, the Santa Claus Rally isn't so much a way to make a quick buck as it is an indicator of market sentiment heading into a new investing year.

The Santa Claus Rally isn't a myth, but it's also not an investment strategy. History shows that the US market has indeed risen more often than fallen at the end of the year, but each year remains unique. For an investor, the Santa Claus Rally can be an additional factor in decision-making, but it's not a substitute for a long-term plan and diversification. It can confirm the strength of a trend, but it doesn't replace analysis, diversification, or a long-term strategy. In practice, the most prudent approach is to view the end of the year as a time to rebalance your portfolio, assess risks, and gradually reenter the market, rather than trying to catch short-term moves.

Holiday optimism can support the market, but sustainable results are still built on strategy, discipline, and an understanding of risk.

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