It might seem premature to start the semi-obligatory discussion of a so-called “Santa Claus rally” even before Thanksgiving. The market seems to start moving much faster beginning around this time of year, though, so any year-end rally that’s in the cards for 2014 might well begin before many of us are ready for it.
Better to prepare too soon than too late.
On the other hand, are investors preparing for naught? The premise of a Santa Claus rally makes sense, but the market’s generally accepted truths usually fall short of expectations when put to the test.
So the question at hand is: Do all the year-end rally theories actually hold water?
The only way to know for sure is by going back in time and crunching the historical numbers. So, we did.
This is what we found:
Which Santa Claus Rally Are We Talking About? All of Them.
The Santa Claus rally isn’t a sanctioned or sponsored event, but investors have established a handful of time frames that are considered as the right period of the year for such a year-end rally to unfurl.
The most commonly accepted time frame is the set of days between Christmas Day and the end of the second trading day of the New Year. Others more broadly define it as the calendar month of December, while a few even start the Santa Claus rally clock starting on the first day after Thanksgiving and watch it all the way through the end of the calendar year.
In the interest of completeness, we’ll measure the S&P 500 Index’s gains — and odds of a gain — for all three potential definitions of a Santa Claus rally going back for the past 30 years.
1. From Christmas Through the First Two Trading Days of the New Year
Beginning with the most commonly accepted Santa Claus rally period (between Christmas and the second trading day of the next year), fans and followers of the theory might be mildly pleased to learn that over the past 30 years, the S&P 500 gained an average of 1.1% during this time.
No, it’s not a wildly compelling figure, but it’s an average, and the typical length of this time frame is only seven days. Expectations have to be somewhat tempered.
That being said, the S&P 500 only made gains of any size during this period in 21 of the past 30 years. Those are technically positive odds, but not impressive odds … considering the market is supposed to go up most of the time anyway.
2. The Month of December
Presuming the entire month of December is an eligible market, the Santa Claus rally bore a little more fruit. The average gain doled out by the S&P 500 in all the Decembers since 1984 is a healthy average of 2%.
Better still, the index made some sort of gain in 25 of the past 30 Decembers.
3. From Thanksgiving Through the End of December
Finally, the least-used definition of the Santa Claus rally time of year — between Thanksgiving and the end of December — unsurprisingly proved the most fruitful. The average gain during this stretch for the past 30 years is a solid 2.2%.
The S&P 500 also posted a gain in 25 of the past 30 years for this approximately-five week stretch.
Bottom Line on Year-End Rally Theories
Giving credit where it’s due, the math supports the basic premise of whichever version of the Santa Claus rally you’re a fan. It’s not like the numbers at hand are too large to pass up, though.
Indeed, if you’re only intent is to get in and out in just a matter of days, commissions and slippage are likely to eat at whatever meager gain is apt to be in the cards for any given year.
Your best bet next month is simply to do what you would normally do anyway, and not do what you normally wouldn’t do.