Christmas Crash Or Santa Claus Rally?

Every year a certain stock market phenomenon is said to recur, anticipated with excitement by investors: the so-called Santa Claus rally. It is held that stock prices typically rise quite frequently and particularly strongly just before the turn of the year.

I want to show you the Santa Claus rally using the Dow Jones Industrial Average (DJIA) as an example. The DJIA has a very long history and is therefore particularly useful for conducting a long-term analysis.

Recurring trends can be discerned at a glance on a seasonal chart

The chart below is not a standard chart that depicts a price trend over a specific time period. Rather, this seasonal chart shows the typical seasonal pattern of the DJIA. Specifically, it illustrates the average returns generated by the index in the course of a calendar year over the past 119 years. The horizontal axis shows the time of the year, the vertical axis shows the price information indexed to 100.

DJIA, seasonal pattern over the past 119 years

 

The Santa Claus rally starts in mid-December. Source: Seasonax

Due to the very long time period under review, the chart is an excellent reflection of seasonal trends that are stable in the long term – random patterns are pushed into the background.

Stock prices post disproportionately large gains during the Christmas season

The positive seasonal time period at the end of the year is highlighted in dark blue on the chart. The Santa Claus rally starts on December 17 and typically lasts until January 6 of the following year.

The average return achieved in this time period amounted to 2.08 percentage points - a gain generated in just 20 calendar days. Thus the Santa Claus rally generated an average annualized gain of 45.52 percent!

For comparison: in the rest of the time the annualized gain of the DJIA amounted to a mere 3.21 percent.

In short, the seasonal trend around the Christmas holidays is quite extraordinary. 

One often cited reason for the stock market rally at the end of the year is window dressing by investment funds – i.e., investment funds support prices at year-end in order to prettify their results – which has the purely coincidental side-effect of boosting bonus payments, which are often calculated and paid at the turn of the year. Psychological reasons are likely to play a part as well, as the positive holiday mood and the strong desire to buy things (such as Christmas presents) spill over into stock markets.

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Simply navigate to www.app.seasonax.com to find out more.

Disclaimer: Past results and past seasonal patterns are no indication of future ...

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