Share Prices & Company Research


27 December 2023

Unwrapping the Santa Rally

This article was taken from the December 2023 issue of Market Insight. To subscribe to our investment publications, please visit

What a year it has been for investors. After another five base rate increases by the Bank of England, inflation is falling but still well above target, and lacklustre market returns mean you might not be feeling all that festive. UK equity markets in particular have had a rough time. With such a mixed bag for investors to contend with, wouldn’t it be nice to round out the year with a little boost in the form of a Santa rally? Let us unwrap this market phenomenon and see if it stands up to scrutiny. Firstly, what exactly is a Santa rally? It describes a tendency for the stock market to climb by 1-2% over the last five business days of one year, and the first two days of the incoming one. The event occurs in roughly eight years out of ten according to the Wall Street Journal, although we all know that nothing in the investment world is certain.

The phenomenon was first identified by Wall Street guru, Yale Hirsch, in his 1972 edition of the ‘Stock Trader’s Almanac,’ a compendium of market cycles and patterns for ordinary investors. Along with the Santa rally, he highlighted several others including the ‘January barometer’ and ‘best consecutive six months.’ Of these, it is the Santa rally that has become perhaps the best known. In his almanac, he examined the period from 1952-1971 and found that a rally had occurred in 17 out of the previous 20 years, with the S&P 500 making an average gain of 1.35%. Initially, his definition included only the last four trading days of the outgoing year, but this was later extended to the full five. To be classified as a true rally, the market simply needs to make a positive return. In 2006 we technically enjoyed a Santa rally, with a return of 0.0003% - faced with such meagre returns, a humble lump of coal might have offered more to celebrate. Hirsch also suggested that a Santa rally, or lack of, could serve as an insight into what the market might do over the next year. To this end, he penned the couplet ‘If Santa Claus should fail to call, bears may come to Broad and Wall.’

Hirsch only examined a return in a relatively small timeframe, and this was over 50 years ago now. How has his theory stood up in the proceeding years? Market spectators and academics have attempted to apply some more analytical rigour in the search for answers. One study published in the Journal of Financial Planning in 2015 found the phenomena was statistically significant; higher average daily returns were found in the US stock market, and several large overseas indices. Other studies have concluded the opposite, however, so the consensus is not unanimous. The upshot seems to be that the Santa rally is an ethereal entity; we are not quite sure if it exists or how we can study it. But if it does, how significant is it, and what could be the cause?

A variety of factors have been put forward about what causes Santa rallies. One suggestion is that as the traders at institutional investors take a break for Christmas, market activity is dominated by more bullish retail investors who inflate stock prices with enthusiastic buying. There is a flaw in this theory, however, as pointed out by Forbes. Investment bankers are not exactly known for their abundance of leisure time. It does tie into another idea which suggests that simple optimism could be the cause. If investors are buying on the expectation that markets will rise, then it becomes something of a self-fulfilling prophecy and markets will indeed rise. This good mood effect could also be exacerbated by companies and governments being reluctant to release bad news close to Christmas. Employees spending and investing their annual bonuses has also been considered as a factor. This seems fairly plausible, until we consider that companies do not all pay annual bonuses at the end of the year. Of those that do, they may not materialise until January payday, so any impact is likely to be minimal.

This year to date, the FTSE 100 has returned a grand total of -0.55%. This is an index very much in need of some Christmas spirit. What are the chances of it receiving some? According to research by Fidelity International, quite good. Its analysis showed that in the 30 years since 1993, the FTSE 100 rallied in December on 24 occasions. While, of course, no investment is guaranteed, perhaps if we have been good then Santa will bring the markets a festive treat.
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.

Unwrapping the Santa Rally
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