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Hulbert: The Santa Claus Rally Isn't Real; Don't Buy Into It

Mark Hulbert looks into returns over the past 124 years. Santa may be real, but the Santa Claus Rally isn't.

Have any of your advisers referred to a supposed Santa Claus Rally? Consider yourself lucky if they haven’t. You will soon start hearing such references, and pretty quickly thereafter get sick of them.

That’s because many on Wall Street are as shameless as the retailers who, earlier and earlier each year, put up their holiday decorations and start their Christmas sales. Last year, according to Google Trends, references to a Santa Claus Rally began appearing as early as Nov. 3.

Making matters worse, there’s little to no statistical validity to the Santa Claus Rally. I know you will be shocked to realize this, but it appears as though Wall Street is cynically taking Santa’s good name in vain in hopes of seducing you to invest more money in the stock market.

So don’t think I am a Scrooge for throwing cold water on a Santa Claus Rally. On the contrary, I am defending the sanctity of the season.

What Is the Santa Claus Rally?

To be sure, as no doubt you will notice when you start paying attention to those who refer to a Santa Claus Rally, hardly anyone bothers to precisely define what it entails. So it’s difficult to know for sure that no such rally exists. But, after analyzing a number of possible definitions of seasonal strength between now and Christmas, I have come up empty. Let me review a couple of the leading candidates.

Claim No. 1: November and December Are Strong Months

One possible definition of a Santa Claus Rally might be that November and December are above-average months in the stock market. And while there are definitely sub-periods in U.S. market history when that has been the case, it is not true generally.

Consider a ranking of months based on the average return of the Dow Jones Industrial Average back to its creation in the late 1890s.

MonthRank based on average DJIA return since 1896

























As you can see from the table, July is in first place, December is in second place, November is in fifth.

A possible argument might be that, though November and December individually aren’t at the top of the performance rankings, together they represent the strongest two-month stretch of the calendar. And there is some support for this comeback. The DJIA’s average November-December return since 1896 is a gain of 2.5%, which is above the average two-month gain for all months of 1.3%.

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There’s less here than meets the eye, however. Because there is such wide variability in the year-to-year returns over the two-month stretch in November and December, a statistician cannot say at the 95% confidence level that its above-average performance is statistically significant.

One way to appreciate why the statistician can’t be confident is the number of times over the last 125 years in which the DJIA has fallen over the November-December period. It’s done so 28% of the years, in fact. That’s a high-enough proportion to make it too risky to bet heavily on the market being higher at the end of December than it was on Halloween.

Claim No. 2: A Particularly Strong Rally Occurs at Some Point Before Christmas

The stock market may not be stronger overall during November and December, but it’s still possible that an above-average rally could occur in the weeks leading up to Christmas.

To analyze whether that is the case, I measured how large such a rally could be if you got into stocks at November’s low and exited at December’s pre-Christmas high. Of course it’s unrealistic to expect to capture this rally, since you’d have to possess remarkable clairvoyance to pick the days of the exact low and high. But measuring the rally this way captures the largest possible gain that such a rally could produce.

At first blush such a rally appears to be very impressive indeed. Since the DJIA’s creation in the late 1890s, the rally measured in this way averages 7.5%. If such a rally were to occur at today’s levels, it would be the equivalent of around 2,800 Dow points.

Unfortunately it’s too good to be true. That’s because there’s nothing particularly special about the November-December rally measured in this way. I measured comparable rallies for the other 11 months of the calendar, and they are just as impressive. The average across all months is a rally of 7.3%. The 7.5% rally from November’s low to December’s high is not meaningfully different than this average.

The Santa Claus Rally That’s Real

There is one year-end seasonal pattern that is statistically significant, though hardly anyone refers to it as a Santa Claus Rally. That’s because this seasonal strength doesn’t kick in until after Christmas. Specifically, this period of above-average strength lasts from the day after Christmas until the first trading days of January—six trading sessions.

Since 1896, the DJIA’s average gain over period has been 1.5%, far higher than the 0.2% average gain across all six-day holding periods throughout the year. That’s statistically significant.

The source of this above-average return, according to researchers, has nothing to do with Santa Claus. The gain instead represents the confluence of two other seasonal patterns: Turn-of-the-month strength and turn-of-the-year strength. Both trace to monthly contributions into 401(k)s, much of which is invested in the stock market.

The bottom line? Santa Claus is busy enough without being asked to also provide holiday goodies to investors. So let’s leave him out of our investing calculus.

None of this discussion means that the stock market won’t rally strongly between now and the end of the year. It may very well do so. Just don’t blame Santa if it doesn’t.