Ho Ho Ho: Is the Santa Claus rally on its way?

Ho Ho Ho: Is the Santa Claus rally on its way?
Eileen St. Pierre, The Everyday Financial Planner

You may have heard of the Santa Claus rally. No, it’s not a race of fat men in red suits driving reindeer-drawn sleighs. It refers to the tendency of the stock market to rise in December, in particular during the last trading week of the year between Christmas and New Year’s Day. I originally published this blog post two years ago. I decided to re-release it this year, given the recent upturn in the stock market after the presidential election. Some believe that the Santa Claus rally has started early this year.

What causes the Santa Claus rally?

A variety of reasons have been given:

  • Investing of Christmas bonuses – The only Christmas bonus I have ever received in my entire life was an extra $50 for wrapping hams for the Honey Baked Ham company one Christmas break during college. To this day I have never set foot back in the store.
  • “Window dressing” by portfolio managers who lag their benchmarks and want their performances to look good at the end of the year.
  • Completion of trades for accounting and tax reasons.
  • Who can be pessimistic at Christmas time?

Does the Santa Claus rally always take place?

Santa in sleighAccording to The Almanac Investor, the S&P 500 has averaged 1.6% during this last trading week since 1969. But no, Virginia, the Santa Claus rally does not always happen.

 

How can you take advantage of the Santa Claus rally?

You should not try timing the market – the professionals who trade using computer algorithms will beat you to the punch. The key is to be properly invested in stocks for the long-term. If you have established that you want 60% of your retirement to be in stocks and the other 40% in bonds, then you will automatically reap the benefits of the Santa Claus rally if it occurs.

Here are some other tips:

  • Hold off stock sales until January, unless you need the capital gains this year for tax reasons (to use capital losses to offset these gains).
  • If your portfolio has become over-weighted in stocks, wait until January to rebalance it.
  • Many tax-managed funds pay a large dividend at the end of the year so you want to make sure you get this payout before selling.

Here’s hoping enough of us have been nice for Santa to give us a strong finish for the stock market in 2016!

Visit my Basic Financial Management page for more information on investing.