The Santa Claus rally refers to a calendar effect involving a rise in the United States stock market towards the end of the year.
The name is given to the rally as a result of its proximity to the observance of the Christmas holiday.
In particular, this includes the last five trading days in December and first two trading days in the New Year in January.
While not guaranteed to occur every year, the Santa Rally has routinely been observed over 75% of the time since 1972, owing to a wide range of factors.
Of note, this performance is higher on average than other normal seven-day trading periods.
The Santa Rally also precisely includes this time frame and does not extend towards other dates, either before or after.
What Causes the Santa Rally?
There are at present no universal explanations for the Santa Rally, nor does it occur every year.
However, there are several factors which can commonly attribute to the rally, which are not even specific to the Santa Rally itself.
For example, markets commonly rise during this period due to increased investor purchases.
Given the proximity of Christmas, retail spending is always higher during this time of year.
Additionally, this period always sees lower volumes due to traders taking holidays or vacations, which make it easier to see moves in the markets.
There is also evidence of a slowdown in tax-loss harvesting that can depress prices at the beginning of December.
Finally, short sellers or less optimistic investors historically tend to take time off and go on vacations around the holidays, namely in the United States and Europe.
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