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Christmas carols like “Santa Claus Is Coming to Town” are still in the air—and hanging over Wall Street. This is the time of year for the widely anticipated Santa Claus rally.

One popular explanation for this market phenomenon is captured in the saying, “If Santa Claus should fail to call, bears may come to Broad and Wall.” That formulation seems to date back to a 1973 issue of the Stock Trader’s Almanac.

According to that widely cited source of stock market lore and seasonal patterns, the time for the rally is the last five trading days of the year, combined with the first two trading days of the new year. For this year, that period runs from Wednesday, December 24, through Monday, January 5.

If we get an average Santa Claus rally, we can expect a gain of 1.3%. That figure aligns with long-term data showing the S&P 500 has averaged roughly a 1.3% gain during this period and has closed higher in about three-quarters of occurrences going back to 1950, according to Dow Jones Market Data.

Given that there are 252 trading days in an average year, that gain would suggest an annualized return of 46.8%.

To find that return, I assumed you could earn 1.3% every seven trading days. The calculation, fairly standard although imprecise, is to multiply the gain by 252 and divide by the number of trading days in the holding period. In this case, that is (1.3 × 252) ÷ 7.

My purpose for that calculation wasn’t to highlight the potential gains of this strategy, but to highlight the power of small gains over time. I believe that small gains, such as 1.3% in less than two weeks, can create great wealth in the long run.

Now back to the Santa Claus rally—specifically, the second part of the adage suggesting that without a rally, a bear market follows.

We have seen some bad years when Santa failed to call, notably at the end of 1999 and again in 2007. Bear market declines of more than 50% followed each of those periods.

At other times, however, the absence of a rally led to little more than flat market performance. Years like 1995 and 2005 followed down Santa Claus periods without significant market damage.

More recently, the relationship has weakened further. Last year produced a Santa Claus selloff rather than a rally, with major indices slipping by 0.4%–0.7%. The Dow Industrials recorded its first decline during the period in nine years, while the S&P 500 fell for the second consecutive year.

Taken together, the data suggests there is no consistent or tradable relationship between the popular saying and subsequent market performance.

In my experience, this is often the case. Popular sayings aren’t trading rules, and even most widely accepted trading rules fail when tested rigorously.

I believe everything needs to be tested, analyzed, and reviewed frequently. Data from quantitative tests is the key to my success in the markets, and I hope you rely on data instead of adages as well.

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