Skip to main content

So you've heard of Santa's reindeer -- Dasher, Dancer, Prancer and Vixen -- but how familiar are you with jolly old elf's rally? It may not be as well known as Rudolph, the red-nosed caribou of musical renown, but it is recorded in the annals of history.

And like the character it's named after, it bears rewards. The Santa Claus rally, in technical terms, is an increase in the S&P 500 within the last five trading days in December and the first two in January. The period has shown an average gain of 1.4% since 1969, according to the 2016 Stock Trader's Almanac.

From the close of trading on Dec. 22 through Jan. 4, the S&P 500 has gained 0.43%, reflecting broad-based optimism in financial markets in the wake of Donald Trump's surprise victory in U.S. presidential elections in early November.

The rally hasn't occurred ever year, however. When it doesn't, it bodes ill for the remainder of the year. The seven-day period saw stocks fall 4% at the end of 1999, for instance, and the Dow Jones Industrial Average began a 38% slide in January 2000 that lasted for more than two years, the Almanac says. 

Less than a decade later, the end of 2007 saw the third-worst reading since 1950, presaging the 2008 financial crisis and the second-worst bear market in history, according to the Almanac.

"If Santa Claus should fail to call," the saying goes, "bears may come to Broad & Wall," the address of the New York Stock Exchange. There's a good chance the voracious mammals will keep their distance this year, leaving the brass bull just blocks from the exchange -- at the southern tip of Broadway -- to rule unchecked.

"It's up," Jeff Hirsch, editor-in-chief of the Stock Trader's Almanac, said in a phone interview. "That's all that matters. It has nothing to do with magnitude per se. It has to do with the fact that we were able to be positive during the seven-day period." 

Scroll to Continue

TheStreet Recommends

On Wednesday, the Dow Jones Industrial Average gained 0.30% to 19,942 -- approaching, once again, a historic milestone of 20,000; the S&P 500 rose 0.57%, and the Nasdaq climbed 0.88%.

Image placeholder title

"Performance in the next one to two quarters has tended to be below average when the S&P 500 closes lower during the Santa Claus Rally," according to an Oppenheimer technical analysis. 

"The S&P 500 has averaged a 1.2% loss in the subsequent three months following a negative Santa Claus Rally versus an average 2.8% gain following a positive Santa Claus Rally," Ari Wald, an Oppenheimer analyst, wrote in a note to clients.  

For U.S. markets to retain the gains, though, corporate earnings will need to meet investor expectations, said Mike Baele, managing director of investments for U.S. Bank Private Client Reserve. 

"Santa Claus certainly came early for investors this year," Baele said in a phone interview. "With the run-up that we had from the election into the holiday season, that was truly a remarkable run based on the hope of a more fiscally stimulative administration going forward." 

Although the first five trading days of 2016 weren't great and there was a market selloff in February, the year ended with decent growth, Baele said. The Dow Jones added 13.5% in the period, a double-digit percentage increase which has happened only four times in the past 10 years. The S&P 500 climbed 9.4%, and the Nasdaq rose 7.5%.

"A lot of the returns have been pulled forward based on hope," Baele said. "To the extent that hope is realized, we'll hang onto the gains. I think most of the stimulus we're going to see is actually going to be a 2018 story because it just takes time."  

In the interim, other indicators such as the so-called January Barometer offer hints about market performance over the next 12 months