Is Santa coming to Wall Street?
Santa Claus Rally
For most of us, Christmas isn’t just the most magical time of year. It’s also the constant thoughts about how to survive the final Christmas rush. However, not only people can be affected by it. In the end of the year, Markets have to suffer Santa Claus Rally as well. After all, markets are ruled by adults, and every adult always remains a little kid even on Wall Street.
So, what exactly does it mean? A Santa Claus Rally means a hike in the price of stocks that usually happens in the last 5 days of December till the first 2 trading days in January. The Rally was first mentioned in 1972 by Yale Hirsch in Stock Trader’s Almanac. It holds the place of honour among the world’s financial curiosities.
There are numerous explanations for this phenomena, including tax considerations, happiness around Wall Street, people investing their Christmas bonuses and the fact that the pessimists are usually on vacation this week. Others think that Santa Claus Rally is an inevitable result of people buying stocks in anticipation of the rise in stock prices during January (also known as the January effect).
Is it profitable
By all means, this can be the best time of year to invest, but the truth is it can be the worse too. The rally depends on various factors, where each is one can be enough to tip the scales over. Just as it happened 2 years ago when the S&P 500 index drop for more than 13% between its November highs and February lows.
"A strategy of going long the S&P 500 the week before Christmas - specifically the 245th trading day of the year - and holding for 10 trading days gives positive returns 81% of the time." - Adam O'Dell, Dent Research Chief Investment Strategist.
Have we been good this year?
According to Business Insider, there are 7 factors that cause the Santa Rally:
- Taxes: the tax year ends on December 31st., so prices tend to go up.
- Also, you surely do not mind waking up at 4 a. m. because it is time to bet on rising of EURUSD currency pair.
- Window dressing: portfolio holdings are also reported on December 31st.
- Cash charges: investors try to convert cash into stocks.
- Feel good factor: well, that’s the thing about holidays.
- Illiquidity: less liquid markets tend to accentuate trend moves.
- Christmas cash flow: totally intertwined with the Christmas bonus.
- Self-fulfilling prophecy: the more people expect a Santa rally the more likely they are to buy stocks in the December period.
However, this year tax rally seems to be the most influential factor, all due to the Donald Trump’s business-friendly tax reforms.The markets, especially the US, look expensive, stable and generally as a healthy bull market at least for now. The S&P 500 index is currently at its highest for the last 15 years (2,683). The FTSE 100 also hit a new peak since May 1997.
Generally, we can say that December was a very strong month for investing, so it still can surprise you with a couple of nice presents.