The Santa Claus Rally: five things investors need to know

It seems almost too early to be talking about the Santa Claus rally, but with Christmas decorations going up in shops in the UK (and Japan as I saw 10 days ago), and with restaurants taking bookings for office parties, now might be the time to look at this seasonal phenomenon.

What is the Santa Claus rally?

The Santa Claus rally is a repetitive trading pattern that often affects markets in December. It is most in evidence in US equity markets. It seems difficult to discuss it when US markets in particular have had such an impressive year already. The S&P 500 index is up over 23% YTD, but this momentum could set up for further gains in December.

Q: Is the Santa Clause rally still relevant in the era of algorithmic trading?

Capital markets have changed a great deal in the last 20 years and just looking at the S&P500, algo trading probably makes up a staggering 80% of daily volume in the index. Do algo trading programs care about Santa Claus? Active money managers like hedge funds will still be wanting to beat their benchmarks in order to collect their fees, which could lead to more ‘index chasing’ by fund managers as we approach year end. This could even lead asset managers to dial up risk.

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Q: Can we really believe in Santa Claus?

According to analysis from CFD broker Pepperstone, if you look back 20 years, December has traditionally been a strong month for US stocks. The S&P 500 has, on average, gained 0.9% during the month. There are always exceptions, and we’ve had a few nightmares before Christmas, most impressively 2022 (-5.9%) and 2018 (-9.8%). But take those two outlying years away and the return is, on average, 2.6%.

Q: Is there going to be a Santa Claus rally in 2024?

This is a trickier question. The S&P 500 closed higher in the month of December four out of the past five years. But there can be a degree of selling in early December, which means the 1 December buy date looks riskier. Statistically, December equity returns are higher if the YTD performance of the market has also been higher going into December. In the last 20 years, According to Pepperstone, in 10 out of the last 20 years, when the S&P 500 gained more than 10% through the previous 11 months, the average return in December is 2.2%. Conversely, in those years when the index was up less than 10%, the average monthly return in December was -0.6%.

Q: What factors make a Santa Claus rally more likely?

There are a number of tailwinds backing this horse in 2024. As mentioned, the momentum in the S&P 500 looks powerful, with the index up 23%. We are also seeing record levels of corporate buybacks in the US market which is suppressing volatility and reducing equity drawdown risk. Active rotation by market players moving out of S&P 500 stocks – which they see as too hot – into other areas is also a sign of a currently healthy bull market. The overall US economic growth argument still looks solid, and is supported by low recession risk.

Q: Do we see Santa Claus rallies in other markets too?

This really depends on which market you are trading. Some markets don’t like Santa. A good example is the USD, with the dollar index seeing an average December monthly decline of -0.6% and closing lower the last seven consecutive years. On the other hand the EUR has closed up against USD over December in the last seven years. Both the German DAX and the ASX 200 have closed up in December 66% of the time. Both indices see an average gift of 1.5% to investors during the Yuletide season.

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