Skeptical kids can doubt whether Santa Claus exists. But for stock-market statisticians, there's not much debate: The year-end lift known as the Santa Claus rally is no myth.
The stock market typically posts modest, but reliable, gains in late December into the beginning of early January.
"It's pretty much like clockwork," says Jeff Hirsch, editor of the Stock Trader's Almanac, which tracks market trends. "And when it doesn't happen, it can be a very helpful warning of impending trouble."
This year the stock market began December in somewhat typical fashion with a stagnant first half of the month. The Standard & Poor's 500 Index is up just 0.6 percent so far in December, and the Dow Jones industrial average is down 0.2 percent.
That leaves room for the market to snap back by the end of the year, although stocks are still facing headwinds from lingering doubts about the economy as well as trepidation among investors about the huge gains logged so far this year. The S&P is already up 22 percent in 2009, the Dow 18 percent.
The entire period around the end of the year, though, has a bullish track record.
Consider:
- November through January tends to be the best three-month span for stocks. Over the past four decades the average gain from Nov. 20 through the end of January has been 4.2 percent, or an annualized rate of 23 percent, according to James Stack, president of InvesTech Research in Whitefish, Mont.
- December is the best single month, with the Standard & Poor's 500 stock index averaging a 1.6 percent gain. The first December after a bear market ends performs even better, averaging 3.1 percent.
- The S&P has increased an average of 1.5 percent during the seven trading days that start with Christmas Eve and end with the first two days in January since 1950. That's the widely recognized period for the Santa Claus rally, as first identified in 1972 by Stock Trader's Almanac founder Yale Hirsch, Jeff's father.
- Stocks went up in 12 of the last 15 of those year-end periods.
To better understand what drives the Santa Claus rally, let's look at the variety of positive factors for the stock market that usually come together around this time of the year.
The holidays are the strongest retail season of the year, giving a boost to the economy while also generating positive headlines. Year-end investment reports also tend to offer upbeat outlooks for the coming year, and often plug hot stock picks just as investors are repositioning their portfolios.
And since lots of investors are already in a good mood this time of year anyway, more people tend to be buying rather than selling around the holidays.
"It's one of the most reliable rallies of the year," says Scott Marcouiller, senior equity strategist for Wells Fargo Advisers. "The probability is very high that we get a move up before the end of this year."
Also, investors who might normally sell stocks for tax purposes late in the year could be more likely to hold off this time around. Since this stock market rally is only nine months old, any gains from stocks bought this year would be considered short-term profits by the IRS. That would mean a much higher tax rate than gains on assets held for more than a year.
Even those who aren't interested in buying stocks during the holiday season would do well to keep an eye on the market. In years when there hasn't been enough enthusiasm for a Santa Claus rally, it's often been a sign that turmoil lies ahead.
After 1999, for example, when there was no Santa Claus rally, the market tanked in 2000. And a late-year drop two years ago was a forerunner to a disastrous 2008.
Some market experts take dim views of trends based on the calendar. But the Santa Claus rally still has plenty of believers on Wall Street.