Happy Holidays! Regardless of whether you celebrate Christmas or not, you probably know all about Santa Claus – Hollywood has certainly made sure of that. But have you heard about the Santa Claus Rally?
That’s right – there’s a yearly event (which isn’t to say it happens every year) in the market and it won the adorable name of ‘The Santa Claus Rally’. It occurs when shares sometimes begin to rally during the last weeks of December and continue into the first couple of days in January. This is a historic phenomenon, so you can’t just assume it’ll happen every year, but in the past it has occurred often enough to draw attention.
Why do shares rally around this season? There are several possible explanations.
1. Tax considerations
2. A general ‘jolly’ mood in Wall Street
3. Xmas bonuses
4. Bear investors could be on vacation
5. A self-fulfilling prophecy
Some people suggest that the Santa Claus Rally is connected to the ‘January Effect’. What’s that, you ask? We were just about to explain.
The January effect
The January effect is the theory that share prices rise in January more than they do every other month of the year. Please read this again: A theory, not necessarily a fact. The January effect will sometime compel traders to purchase shares in December in anticipation – again, not necessarily a valid one – of prices rising in January. The January effect was initially discovered in 1942 by an investment banker named Sid B. Wachtel. He noticed that since 1925, small shares tended to perform better in January.
Why could this be happening? Well, many companies sell their shares towards the end of the year for tax reasons. However, employees who receive Christmas bonuses could invest them into purchasing shares.
Is the Santa Claus Rally real?
There are many people who question rather the Santa Claus Rally is even real. According to various data, shares have climbed in the fourth quarter nearly four out of five years as of 1945. This is just historic data though and as we know, the economy is constantly changing and no one can predict for certain what will happen this year.
Although traditionally shares have sometimes rallied at the end of December and the beginning of January, this is obviously no type of guarantee.
Will we see the Santa Claus Rally take place in 2017? Stay informed and be ready to take advantage of market opportunities.