The Santa Claus Rally could certainly hold some opportunity for investors — especially those who have gotten an early start.
Most investors will likely have heard of the Santa Claus Rally, the period around the end of the year when stocks tend to rise ahead of a healthier market in January.
This can be a particularly auspicious time for investors — especially those who get an early start.
There are a number of explanations for the Santa Claus Rally, mostly tied to investors taking advantage of tax-loss selling or positioning themselves ahead of the rise in share prices usually seen in January. Of course, having a Christmas bonus to spend and some extra time to look at stocks over the holidays doesn’t hurt either.
In 2018, investors are beginning to consider this recurring seasonal pattern again, and hoping it could inject some optimism into current market conditions. Read on to learn how you can use these circumstances to take advantage of the Santa Claus Rally this year.
When does the Santa Claus Rally start?
There is some debate as to when exactly the Santa Claus Rally starts. Jack Ablin, chief investment officer for BMO Capital Markets, once said that the Santa Claus Rally and the “January effect” are one and the same — it’s just that the share price increases once seen in January are now happening earlier.
“When I started in the business, I remember reading studies about the January Effect,” the Associated Press quotes him as saying. “Once that became common knowledge, the January Effect turned into the December Effect, and now appears to be creeping into November, too.”
Meanwhile, Brooke Thackray, a research analyst at Horizons Investment Management who focuses on seasonal investing, believes the rally starts in a more narrow timeframe. “I do believe that the rally really starts in mid-December,” he has noted. “A lot of people are familiar with the Santa Claus Rally and want to get in before it actually starts.”
Still others doubt that the Santa Claus Effect is a dependable phenomenon. “An analysis of the past century reveals that the stock market in the weeks prior to Christmas is no more likely to rally than at other times of the year,” states MarketWatch columnist Mark Hulbert. He suggests investors “ignore any arguments based on an alleged Santa Claus Rally.”
With such conflicting opinions, it seems as though each investor must judge the market and make an individual call; asking a financial advisor is another good choice.
4 ways to take advantage of the Santa Claus Rally
If you believe in the Santa Claus Rally, there are a few different approaches you can use to maximize your chances of profiting this year. Here’s a brief look at four of them.
1. Get in early, stay late
Thackray suggests that rather than waiting for Santa Claus to “come down the chimney,” a better way to take advantage of the Santa Claus Rally is to use the “Santa Claus arrives early and stays late” strategy, and look at the period of time between December 15 and January 6.
He notes that on average, from 1950 to 2014, the S&P 500 (INDEXSP:.INX) has seen a 2.1-percent gain during that period and has been positive 78 percent of the time. The NASDAQ Composite (INDEXNASDAQ:.IXIC) has similarly recorded average gains of 3.1 percent between those dates from 1971 to 2014, and has been positive 79 percent of the time.
Looking at why that might be, the analyst says that the markets “often get a boost” as money managers settle on their positions ahead of the new year. “A lot of seasonal investors will do their trades early and then start taking time off,” he comments. “Institutional investors put trades in early and then retail investors are really moving the market around.”
2. See what Santa has to offer elsewhere
On the other side of the pond, records show a similar trend with the FTSE 100 (INDEXFTSE:UKX). Fidelity International’s research on the FTSE 100 over the last 30 years “shows that out of those 20 years, 26 of those produced a Santa Rally.” Furthermore, Jason Hollands of Tilney Group says that “[w]ith stock markets currently riding high and market volatility as calm as a duck pond, there is every possibility of yet another good month this December.”
So if you’re wanting to take full advantage of the Santa Claus Rally, another strategy would be to expand your investments into the European market to reap the benefits on both sides of the Atlantic.
3. Keep it in the TSX
For investors not trading in the US and UK, Thackray says that the Canadian stock market also usually does well during the Santa Claus Rally.
David Baskin, president of Baskin Wealth Management, says that an investor’s best bet is to invest in specific stocks or sectors, as opposed to the whole index. As he points out in this video, the S&P/TSX has not made great earnings for investors over the last 10 years.
However, Baskin is bullish on Canadian banks, and “high yielding utilities, pipelines, and telephone companies providing investors with close on to 5 percent cash on cash and with a history of growing dividends. These are opportunities for people to make money.”
Baskin has pointed out that bank earnings have a big influence on the S&P/TSX, and that if banks do well they may drive up the rest of the markets in the last six weeks of the year.
4. Stick to what you know best
Whether your portfolio usually consists of national or international investments, you can often reduce your risk by sticking to what you know. While the data supporting the Santa Claus Rally can be both convincing and tempting, experts agree that investors should exercise caution and not get swept up in the excitement, as results are never guaranteed. At best, if you decide to gamble it may be a smart strategy to only make bets on the companies you know the best.
What will you do?
December is already upon us, but there’s still time for investors to get in early this year and look for bargains ahead of a potential Santa Claus Rally. “For the average investor, this is a good time to be establishing positions,” says Thackray.
Before you invest, it’s good to be aware of the factors that could end up bringing investors coal instead of presents this year. Those include the threat of further tariffs resulting from the trade war between the US and China, and tax-loss selling potentially dampening the market.
There’s also much speculation that a bear market in US stocks is emerging — or possibly even a crash. Notably, 1999, the year of the dot-com crash, is one of the years when the air was let out of the balloon, and the Santa Claus Rally was not realized. If we are in a similar climate, this year could also disappoint.
Do you believe in the Santa Claus Rally? When do you think it starts, and what factors are part of your strategy? Let us know in the comments.
This is an updated version of an article first published by the Investing News Network in 2014.
Don’t forget to follow us @INN_Resource for real-time updates!
Securities Disclosure: I, Amanda Kay, currently hold no direct investment interest in any company mentioned in this article