The “Santa Claus Rally” refers to the historically positive tendencies for the markets in the last trading days of the year and the first few days of the new one.
Christmas is now just three weeks away. While children are being extra kind to make sure they don’t end up on Saint Nick’s naughty list, investors everywhere are hoping the one thing Santa leaves under the tree is a year-end rally to end 2025. The “Santa Claus Rally” refers to the historically positive tendencies for the markets in the last trading days of the year and the first few days of the new one. The exact timeframe encompasses the last five trading days of the current year as well as the first two of the New Year- or a combined seven days in total. As we’ve discussed at various points, the back half of December is typically a strong period, due especially to the visit we often get from our jolly old friend in a big red suit. While no one theory can tie down the exact reason for the rally, the idea is generally accepted to be an air of happiness and cheer on Wall Street. A slightly more practical reason could be from the need for end-of-year tax positioning or the idea that larger institutional investors have gone on vacation, leaving optimistic retail investors to invest their extra Christmas money in their favorite stocks or funds.
See below for the historical return tendencies for the S&P 500 for this seven-day trading period since 1957, shown from strongest to weakest returns.
Whatever the reason for the Santa Claus rally, history has shown a tendency for strongly positive returns. On average, the rally has produced a return of 1.05%, not bad for a calendar week of trading. Furthermore, the “batting average”, or percent of the time we see a positive return during this week is perhaps more impressive, coming in at a near 72% hit rate. The largest Santa Claus rally came in 2008 at 7.45%, a few months before the 2009 rally off the GFC lows. This positive tendency for more pronounced year-end rallies after poor market years seems to be evident, with the three most fruitful visits from Saint Nick coming in years when (SPX) was down more than 10%. Unfortunately, this wasn’t the case in 2022, when our lackluster trading year ended with a lump of coal in our stocking…the S&P slipped 0.54%.
But what if the market is already on the “nice” list to start the rally? Does Santa reward a productive trading year where the market is already up significantly as is the case this year? While we already mentioned the historical averages following poor years to be slightly higher than those of better ones, a glance at Santa Claus rallies during strongly positive (>10%) years reveals a different kind of present left under the tree. While the magnitude of the Santa Rally is not as strong as in those years with ”poor” returns (1.17% vs. 2.73%), the batting average is significantly higher than the “average” year, with positive returns landing in the stocking nearly 86% of the time. The chart below shows 10%+ years, with the best return coming in 1991. Last year marked just the sixth time since 1958 that Santa didn’t deliver a rally in a year that produced double-digit gains and the first time it has happened in back-to-back years.
