In the past, the stock market has made modest gains in late December into the beginning of early January. Widely recognized as the Santa Claus rally, this time period has quite the track record. Since 1950, the S&P 500 has increased an average of 1.5% during the seven trading days that start with Christmas Eve and end with the first two days in January. Stocks have gone up during this period in 12 of the last 15 years.

Other interesting facts (complements of InvesTech Research):

*December is the best single month for stocks, with the S&P 500 index averaging a 1.6% gain. The first December after a bear market ends performs even better, averaging 3.1%.

*November through January has historically been the best three-month span for stocks. The average gain over the last four decades from Nov. 20 through the end of January has been 4.2%, or an annualized rate of 23%.

There are several factors that people theorize are responsible for the Santa Claus rally such as peak retail season (due to holiday shopping), tax considerations, upbeat year-end investment reports (many of which have “top stocks for the next year”), happiness around Wall Street, people investing their Christmas bonuses, and vacationing Wall Street workers.

A prudent investor knows the Santa Claus rally is not an opportunity to make a quick buck (because that would be market timing!), but it’s difficult to ignore all together. After all, the lack of a Santa Claus rally in recent years has signaled turmoil lies ahead. The market tanked in 2000 when there was no Santa Clause rally in 1999 and a late-year drop two years ago preceded a disastrous 2009.

Is Santa Claus coming to town this year?

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Peter Lazaroff, Investment Analyst