The Santa Claus Rally – truth or myth?


By Jean Strock – 09 December 2022

Dear Santa,

Please can we have a market rally this December?

Historic market returns for the month of December show there is some basis to the Santa Claus rally.

The rally typically occurs over the last five trading days of the year and the first few of January. First identified by Yale Hirsch in 1972, the S&P 500 had gained an average 1.5% across those days from 1950 to 1972. Since then, the gain has occurred in 75% of subsequent years.  

Since 1984 the British FTSE100 index has gained on average 2.3% in December, with the next best months being April and July.

Potential reasons for this include an upbeat mood among investors as the holiday season approaches or investors using their end of year bonus to buy shares.  Others suggest that money managers put more money in the markets which bids up stocks and generates a bit of additional year end performance.

There is a good chance that 2022 will also end in a rally. The tone of the US Federal Reserve has been less ‘hawkish’ in the past month as US inflation appears to have peaked. If the Fed decides to increase the cash rate by 0.50% rather than 0.75% at their final meeting on December 14, the markets will respond positively.

However, a Santa Claus rally does not always mean a bull market in the following year and we saw this very clearly across 2022. The S&P 500 gained 1.4% in the Santa Claus rally of 2021 but that was the peak of the market which has been on a downward trajectory since.  

Market volatility is likely to continue in 2023. Inflation may have peaked but it remains too high. There is a risk of recession if central banks over- cook interest rate rises, depressing demand for goods and services and impacting company earnings.  Much of this is already factored into company share prices, and there are potential positives such as China re opening and hopefully a resolution in Ukraine.

At some point inflation will be suppressed and we will move into a fresh business cycle. In the meantime, enjoy the Santa rally if we get one and let’s move into 2023 positively. 

Merry Christmas and a very Happy New Year.

The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances.