The Santa Claus rally is a rise in stock prices that occurs frequently during the last trading days of December. The rally traditionally begins around, or a few days before, Christmas and ends in the first two or three trading sessions of the following year. Historically, in this trading week or so, the S&P 500 has gained an average of around 1.5% (since 1950).
While the end of year rally tends to be pretty reliable, it doesn't happen every year. And it's something that investors and stock traders may want to pay attention to. In years when the markets recorded a loss in the last days of trading, we often saw a bear market the following year.
Santa's lack of a reunion may be a red flag for the coming year. (As an example, a missing year-end rebound in 1999 was followed by a decline in the markets in 2000. 2008, a disastrous year for the stock markets, came after a decline of end of year in 2007.)
In general, the last few months until the end of the year tend to be upbeat as well. December is often the best month, and November-January is often the best three-month period for stocks. 12 of the last 15 year-end periods have seen stock prices go up.
There are also several theories or models related to January. You may have heard the saying that the first four or five trading days in January are the price of the month. A sell-off in the early days indicates that a lot of money (which tends to be reallocated at this point) is withdrawing its support from stocks. However, on closer inspection, this pattern does not appear to have much historical validity.
And you are probably familiar with the so-called January barometer: 'As January goes on, so does the year. When January ends with the markets rising, there is a good chance that the year will end on the rise as well. On the flip side, a declining January turned out to have poorer predictive quality when it comes to year-end in the markets. Overall, the January barometer was significantly more accurate in the bull markets.
There is also something called the January Effect – a tendency for small-cap stocks to recover in the first month of the year. Investors who sell at the end of the year are likely to create tax losses and resume positions in January, resulting in a rebound. The effect is visible in smaller and less liquid micro capsules. It should be noted that the January effect has been significantly weaker in recent years.
The Santa Claus rally is not unique to the US markets. It has also been seen in the FTSE and a number of other stock markets around the world.