Does Santa Claus Visit the Stock Market?

We know that Santa slides down chimneys all over the world on Christmas Eve - but does he visit the stock market, too? According to the Santa Claus Rally, he does. The Santa Claus Rally is the theory that there is a sustained increase in the stock market during the last week of December, right after Christmas, that lasts through the first couple days of January. The Stock Trader’s Almanac found that since 1950, the S&P 500 has gained an average of 1.4% during this period. In the past 20 years, we’ve seen this "Santa Claus Rally" every December with the exception of five. Some people belive that this increase is because the end of they year is a time when everyone is generally more optimistic and warm-hearted, including investors and brokers. The end of the year is also the time when people are considering their taxes, and potentially selling stocks that didn’t perform well so they can write the losses off as tax deductions. This investor behavior could trigger the Santa Claus Rally gains. December is also the month when people are receiving holiday bonuses, which means that they have a little extra money to invest in equities. Others postulate that the holiday cheer reflected in this end-of-year rally is the result of professional wealth managers going on vacation, which leaves the bullish retail investors to influence the markets more heavily. The Santa Claus Rally may also be the precursor to the “January Effect." The January Effect suggests that stocks tend to rise during the first month of the year, and the Santa Claus Rally might be caused by investors getting ahead of this trend. The January Effect used to be very marked and consistent, with returns during Januaries from 1904-1974 yielding five times larger returns than the other months. However, this trend has waned since 2000 and in the last couple decades, it’s more like a 50/50 shot, with stocks sometimes rising and sometimes falling in January. Part of this disruption in the “January Effect” pattern is likely because markets adjusted to the behavior and began getting ahead of the January Effect very early, in December. There are also tax-sheltered retirement plans, such as IRAs and 401(k)s, that affect taxes more than selling stocks does. As we mentioned before in our discussion about the “September Effect”, correlation doesn't equal causation. While there may seem to be a relationship between a certain time of year and the stock market’s performance, it’s never wise to look at past performance as an indication of future results. Trying to locate the seasonal trends in the stock market is fun, but it’s important to be careful to avoid overemphasizing the importance of them, and to stay aware of such biases when it comes to your investments. Our portfolios are actively managed in-house by Sean, whose investment management strategy is data-driven and returns-focused. While there are things that influence the stock market - such as policy changes, inflation, and the shifting status of the COVID-19 pandemic - Sean’s laser-focus on data means that NEST’s portfolios are resilient to headlines and trends. So, whether or not Santa visits the stock market this year, our portfolios will strive to meet their return rate goal, regardless of how the benchmarks are performing. Learn more about our investment management services and how NEST can help your money work as hard as you do. Join other Austin families and individuals and reach out at info@nestfinancial.net for a no-obligation consultation today. 

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