Santa Claus Rally Time: The Odds Of Holiday Market Cheer In 2023

Heading into 2023's final week of trading, traders and investors are likely excited about an official Santa Claus Rally.

That's particularly the case this year, which saw the S&P 500 Index rally a whopping 23% since 2022 ended - a positive change from the 27.54% the stock market fell in 2022.

So, what exactly is a Santa Claus Rally, and how likely is it to occur?

What Is A Santa Claus Rally

The phenomenon, given its label by analyst and creator of the Stock Trader’s Almanac Yale Hirsch, generally takes place during the last week of December into the first few days of January. In some years, the rally has taken place over an extended period, beginning Dec. 14 and lasting over two weeks.

Historically, during a Santa Claus Rally, the S&P 500 has risen an average of 1.3%, but it doesn’t happen every year so it isn’t 100% predictable.

Past Santa Rallies

• Between Dec. 20, 2021, and Jan. 4, 2022, a Santa Claus rally caused the S&P 500 to surge 4.98%.
• The year prior, between Dec. 1, 2020 and Jan. 4, 2021, the ETF spiked 2.43%.
• Between 1960 and 2020, Santa Claus rallies happened about 66.66% of the time
• Since 1993, the occurrence took place 67% of the time, per Stock Trader's Almanac.

What’s interesting, is that during bear markets and economic downturns, the rally can be stronger.

See Also: Goldman Sachs Predicts Continued Stock Market Rally While Fed Advises Caution: The SPY's Path To All-Time Highs

Bear and Bull Markets

A bear market is generally recognized when the S&P 500 declines more than 20% from the high of the previous bull market, whereas a bull market is recognized when the Index climbs over 20% from its bear market low. On Oct. 13, 2022, the S&P 500 reached a low of 3,491.58 and on May 18, 2023, the ETF closed at 4,202.20, up 20% from the October low, which indicated the bear market had ended.

Santa Claus Rallies In Bear Markets

A look back at the last three bear markets, beginning in 1990.

• The three-month-long recession that occurred between July 1990 and October of that same year saw the S&P 500 plummet 20.14%. That year, traders weren’t gifted a Santa Rally, and the S&P 500 declined 6.27% between the weeks beginning Dec. 17 and Jan. 7.
• The bear market that started in 2000, which was brought on by the collapse of the housing market, lasted a whopping 33 months, occurring between January 2000 and October 2002. Over the holiday period, between Dec. 26, 2000 and Jan. 2, 2001, the S&P 500 spiked up 2.62% before continuing in its downtrend. The following year, between Dec. 17 and Dec. 31, the ETF rose 4.47%.
• The Great Recession, which lasted for 17 months between October 2007 and March 2009, saw two Santa Rallies take shape – a 1.32% jump during the week beginning Dec. 17, 2008, and 6.81% surge higher over the week beginning Dec. 29, 2008.
• During the last five trading days of 2022's bear market and the first two days of 2023, the S&P 500 rose 0.8%, falling short of what can be considered an official Santa Claus Rally. 
• Santa Claus Rallies In Bull Markets
• While Santa rallies have taken place during bear markets, their occurrence at the end of a bear market or during a bull market is considered to be an indication that the stock market will continue to rise during the following year. 
• The Santa Claus Rallies of 2008 and 2018 predicted strong bull markets in 2009 and 2019 and out of the 23 times the stock market has spiked higher during the Santa Rally period since 1994, the S&P 500 has risen 18 times over the following year.

Theory Behind The Phenomenon

A number of catalysts may contribute to the rally:

• The end of “tax-loss-selling season,” which begins during the fourth quarter, when traders and investors sell losing positions to minimize capital gains from profits in the stock market, the housing market, or other income sources.
• The receipt of holiday bonuses that traders and investors may decide to invest because the bonus is viewed as “extra money.”
• A period driven by retail traders, who generally have a bullish bias, while Wall Street investors have largely left their desks for vacation.
• The expectation that a rally will take place, which causes a high number of traders and investors to buy stocks, resulting in a self-fulfilling prophecy.

A Look At The Odds

Santa Claus rallies have taken place 58 times over the last 73 years, which means they happen about 80% of the time. While traders and investors haven't quite entered the official Santa Claus Rally period this year, the S&P 500 has risen about 0.85% since Dec. 14 and on Tuesday, the Index was climbing toward its previous all-time high of 4,818.62.

Investors aiming to capitalize on a potential S&P 500 uptrend have several ETF options, such as the SPDR S&P 500 ETF Trust SPY, the largest ETF globally, as well as the Vanguard S&P 500 ETF VOO and the Invesco S&P 500 Equal Weight ETF RSP

Read Next: US ETFs Surpass $8 Trillion In Assets: Top 10 Funds Holding Over $100B Each

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