There is a well-documented occurrence in the U.S. that stock returns immediately following the Christmas holiday are generally very strong. While defined in various ways, the so-called “Santa Claus rally” typically refers to the seven-day period running from Christmas through January 3rd.
Robert Johnson, President and CEO of the American College of Financial Services, Professor Srinivas Nippani of Texas A&M University-Commerce and Professor Kenneth Washer of Creighton University provide evidence in an article forthcoming in the Journal of Financial Planning showing that the Santa Claus Rally isn’t limited to U.S. markets.
The researchers found that markets in Canada, Mexico, Brazil, UK, Germany, France, Australia/New Zealand, Hong Kong, Singapore, Indonesia, and Taiwan, Japan, China, India and South Korea all showed evidence of a Santa Claus rally. Generally, higher returns come with higher risks. However, Johnson, Nippani and Washer find evidence that the variability of returns (as measured by standard deviation) is generally lower during the holiday season.
Johnson indicates that a $10,000 investment in the US during an average rally period would net an investor about $100 (1% return) over a normal seven-day period. If one plans to sell stocks near the end of the year, it would be wise to wait until after the Santa Claus Rally has ended. Discretionary buying should occur just before Christmas.
It appears that in addition to delivering presents to children, Santa Claus provides investors with some holiday cheer.