The Secret About The Santa Claus Rally I Wish Everyone Knew

Written by Julie Brownlee on December 5th, 2016

The Secret about The Santa Claus Rally I Wish Everyone Knew

It’s been described as a “sure thing”…

You see, the looming festive period may hold much more in store for you than just gifts under the tree.

The stock market may have something special just waiting in your stocking.

A gift that could make you richer… A lot richer!

At least that’s what they want you to believe.

When it comes to timing the market, The Santa Claus Rally is easily one of the most popular ones you'll hear.

But does that mean it even works?

And better yet, can it actually make you money?

Today I’m going to answer this and more!

Let me show you…

 

What Is The Santa Claus Rally?

 

The Santa Claus Rally is a phenomenon that some investors swear by…

Simply put, it describes the rise of share prices in December.

This appears to intensify during the final week of the year, between Christmas and the New Year.

The phenomenon is also known as the December Effect.

Historically speaking, the month of December tends to display the strongest gains in stocks than any other month in a year.

 

 

So What’s Behind The Santa Claus Rally?

 

There are many theories behind surging stock prices over the final month of the year.

Examples include…

  • Traders and investors revelling in the festive feel-good factor
  • With year-end bonuses in the bank, investors are looking to put their hard-earned cash to work
  • Investors expect the performances of stocks to do better after the festive rush

There are also other reasons that could contribute to the phenomenon in the US where the tax year runs with the calendar year.

Investors may sell off stocks early in December for tax purposes, before buying more stock as the year comes to an end.

But there is also another reason pushing stock prices higher.

It could be down to investors waiting for the January Effect…

 

What’s The January Effect?

 

Like December, January is also a month where investors expect stock prices to rise.

Demand is very much behind a move higher as buying intensifies.

And for those who’ve not yet had a chance to invest their bonus, they now may get a chance.

The January Effect basically continues the work of the Santa Claus Rally in late December.

But this is all good and well in theory, which is why the real question becomes…

 

Does The Santa Claus Rally And The January Effect Actually Exist?

 

Of course, if this was so easy to predict year after year, the vast majority of investors would be throwing money into stocks in December only to cash out once the January Effect was coming to an end.

These rallies in stock prices over this period of time have happened some years in the past.

But it’s by no means set in stone.

Some years it happens and some years it doesn’t.

So should you try to be cashing in on the Santa Claus Rally and the January Effect?

The Numbers Behind The Santa Claus Rally

For our analysis, let’s look at the performance of the S&P 500 and JSE’s Top 40 over the past decade.

To look for the possible Santa Claus Rally effect, I’ve looked at the performance of these markets over the month of December from 2006 to 2015.

Have a look at the chart below…

The Santa Claus Rally

As you can see, the blue bars denote the S&P 500’s performance and the orange bars show the performance of the JSE’s Top 40.

Over the past ten years, the S&P 500 saw a rise over the month of December 80% of the time. But the majority of these gains were on the modest side.

If you’d bought an index tracker for the month of December for the past ten years, overall you’d have made just over 19%, excluding transaction costs.

But over the same period, the Top 40 only showed a Santa Claus Rally 40% of the time. Any gains were relatively small.

If you’d bought into an index tracker every December over the past decade, you’d have lost nearly 7% of your investment, excluding transaction costs.

Looking at the past ten years, there isn’t any evidence supporting the Santa Claus Rally when investing in the South African market, or at least trying to exploit it.

But, it could be worth a look on the S&P 500.

Any Evidence For The January Effect?

Again, for this we’ll look at the S&P 500 compared to the JSE’s Top 40.

Have a look at the chart below…

The January Effect

This time around, the January Effect was more evident in the South African market.

The JSE’s Top 40 increased over the month of January 60% of the time in the past ten years. The S&P 500 only rose over the month 40% of the time.

If you’d invested each January in the SA market, you’d have made just over 13%, excluding transaction costs.

On the other hand, doing the same on the S&P 500 would have lost you just over 23%, excluding transaction costs.

Looking at what’s happened over the past ten years, it may be worth trying to take advantage of the January Effect in the SA market, but not when it comes to the US market.

 

Should You Trade The Santa Claus Rally?

 

As you can see from our analysis above, there is no certainty that the Santa Claus Rally, or the January Effect for that matter, will happen.

If you like to take on a bit of risk with your investing or trading, by all means give it a go.

But ensure you employ strict money management techniques to keep any possible losses to a minimum.

You could use technical analysis to watch for any impending rallies and try to trade them.

But if that’s not for you, what should you do instead?

From looking at the performances over the past ten years, one thing is very clear.

A buy and hold strategy would have left you much better off.

If you’d invested in a JSE Top 40 tracker in December of 2006 until January of this year, you’d have seen a return of over 93%.

As a comparison, the S&P 500 returned nearly 39% over the same period.

This brief analysis shows that having a long-term investing approach is much more profitable than trying to time the market.

No-one knows with any certainty what’s going to happen on the financial markets.

If you’re serious about growing your wealth, invest in quality stocks for the long run.

Don’t jump in and out the market.

Remember, there are a number of benefits to employing a buy and hold strategy:

  • You minimise transactions costs
  • You have far less work to do when it comes to your portfolio
  • You don’t pay tax unless you sell out of stocks and bank your gains
  • You benefit from possible dividends companies pay out
  • It’s far less stressful than trying to time when to buy and sell

 

How To Make December Profitable

 

In SA, the odds aren’t really in your favour for both the Santa Claus Rally and the January Effect.

Whilst there’s a chance of making money, there’s also the very real chance of losing it.

Trying to time the market more often than not leads to losses, and this is usually because investors doggedly stick to a cliché rather than investing in what’s in front of them.

Instead of trying to chase possible short-term gains over the festive period, spend the time enjoying the holidays with your family and friends.

If you’re desperate to do some work on your portfolio, check that your asset meets your requirements and rebalance if not.

Thinking long-term on the stock markets is a better way of growing your wealth.

Until then, here's to profitable investing. 

Julie Brownlee | The Money Lab

Julie Brownlee
Editorial Contributor
The Money Lab