With Christmas just days away and a surprise cold front hitting the markets Wednesday, investors everywhere can’t stop asking about whether there will really be a “Santa Claus rally.” Indeed, a Santa Claus rally refers to a historical trend where stocks tend to rise in the last five trading sessions of December and the first two days of the new year in January.
So, will there be a Santa Claus rally this year?
Well, maybe. The trend, dating back to 1972, doesn’t have a perfect track record of consistency, per se, though, for the stock market, it’s pretty darn good. The seven days making up the rally have been green almost 80% of the time, resulting in an average gain of 1.3% in the S&P 500.
This year, the window for a Santa Claus rally will fall between Tuesday, Dec. 26 until Friday, Dec. 29, and then on Tuesday and Wednesday of the following week, Jan. 2 and Jan. 3.
While it’s hard to pinpoint any one element that has pushed the rally into existence, it seems the influx of corporate bonuses, the hum of commercial activity and the cheerful holiday spirit typically has a beneficial effect on the stock market.
2023 has already been a notably strong year for stocks, leading some to predict an even more vigorous holiday rally than usual. However, Wednesday’s pullback has put a damper on things.
Every major index fell Wednesday, with the S&P and Nasdaq Composite losing 1.5% of their value. This snapped a 10-session win streak marked the worst day for the S&P in months.
However, it seems the markets are already recovering. Indeed, the Nasdaq and S&P are both in the green at the time of writing, up 0.8% and 0.6%, respectively.
Will a Santa Claus Rally Help the January Effect?
It’s hard to mention the Santa Claus rally without mentioning the January Effect following soon after. The January Effect refers to another trend in which the first five days of trading in the new year are historically a bellwether for stocks for the rest of the year.
Like the Santa Claus rally, the January Effect isn’t an absolute science, though it does tend to hold true more often than not.
This year, stocks jumped 2.4% over the first seven trading sessions, predicting a strong year for stocks. Currently, the S&P and Nasdaq are on track to close the year up 25% and 43%, respectively.
Similarly, in 2022, the S&P fell nearly 2% in the first week of January, preceding a nearly 20% drop through the rest of the year.
As such, expect Wall Street to be keeping a close eye on the markets heading into the New Year and beyond for some notion of what to expect in 2024.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
