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Market Update - A look at the Santa Rally

Market Update

A look at the Santa Rally

The stock market is choc-a-block with rules and sayings which, if followed, should result in ‘sure-fire’ ways to make money. One of the most common is: “Sell in May, go away, come back on St Ledger’s Day”. Historically, the City of London was quiet between May and early September, when the St Ledger horse race is held, as all the biggest players would leave town and escape to the country during the hot summer months. While I haven’t done the research to see how well this heuristic has worked, it’s worth noting that this year the US S&P 500 rose by a respectable 8% between May and the beginning of September, and then fell sharply before hitting a low on 1st October. So, it’s possible that such adages may have held true at one time, but these days are little more than self-fulfilling prophecies due to changes in the way that financial markets are now traded. Could that also be the case with the Santa Claus rally?

What is the Santa Rally?

Many investors follow a rule that states stock markets rally between Christmas Eve and the second trading day of January. Back in 1972, Yale Hirsch, creator of the Stock Trader's Almanac, coined the phrase the ‘Santa Claus rally” as he noticed a tendency for stocks to rise over this seven-day trading period. Just looking back over the last five periods and focusing on the US S&P 500 which is arguably the world’s most important stock market barometer, we see the following: in the 2016/17 period there was a gain of 0.18%: for 2017/18 we saw a gain of 0.93%: over 2018/19 there was a gain of 4.2%; for 2019/20 the gain was 0.34%, and for 2020/21 it came in as +0.65%. So, yes – there have been gains on every occasion. But the only significant one was in 2018/19, and that happened to coincide with the S&P hitting a low point, following a 16% decline in the three months leading up to the year-end. It’s also worth noting that in 2015/16 the S&P lost 2.1% over the seven-day Santa Rally period, so it doesn’t always hold. In terms of why equities should rally, some say that investors are upbeat going into the holiday season. So much money is spent on food, drink, presents and hospitality in general that it has a knock-on effect on markets. It is also suggested that many investors, particularly in the US, bung their Christmas bonuses into the stock market prior to the year-end.

Is it a reliable indicator?

Recent evidence suggests that the Santa Rally is a real thing. But while stock market gains may have been significant back in the 1970s, they are less so today. It’s probably not something one should rely on as a reason to go long. The trading period is too short, for a start. And there isn’t a solid explanation why markets should behave this way. As a comparison, back in November, all the market chatter ahead of Thanksgiving was around how stock markets rally into the US holiday and beyond, as Black Friday sales morph into Cyber Monday. But this Thanksgiving Friday, the US Dow Jones slumped by 2.5% to post its biggest one day fall in over a year. The reason? Investors panicked after a new variant of the coronavirus was discovered in Southern Africa. It’s events and sentiment that tend to be the biggest market drivers, not dates on the calendar. Events have more effect on financial markets than any glib and lazy cliches which can trick investors into trying to turn a profit without doing their homework. Also, it’s important to remember that markets are more global and accessible than ever. Trading is 24 hours a day, and market holidays have relatively little impact when compared to the last century. The technology has changed too, meaning traders can keep active even when they are away from their desks. But while the old sayings may not have the impact they used to, there’s a rule of thumb that investors should follow - go long in bull markets and short in bear markets. Learning how to distinguish one from the other is the most useful skill a trader can have.

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