As December draws to a close, investors are once again turning to the markets for signs of Santa’s gathering. This seasonal pattern refers to the last five trading days of the year and the first two sessions of the new year, a period that has historically generated strong returns.
It was the Stock Trader’s Almanac that first brought attention to this trend. Data tracked since 1950 shows that these seven trading days consistently produce above-average gains. During this period, the average rose about 1.3% and finished higher almost 80% of the time.
The contrast becomes clearer when compared to long-term performance. The S&P 500 returns about 10% on an annualized basis, which translates to an average gain of about 0.2% over a typical seven-day period.
Simply put, the success rate and average gains during the Christmas rally far exceed what the markets usually deliver in an average week.
Why do stocks often rise during the Christmas rally?
Despite decades of analysis, markets still have no single, agreed-upon explanation for the Christmas rally. Several factors are likely working together.
Investor sentiment plays a role. The holiday season often brings a more optimistic mood, which can tilt behavior toward buying rather than selling.
End of year positioning also matters. Investors and fund managers are rebalancing portfolios, deploying bonuses and tidying up their holdings ahead of the new financial year, creating additional demand for stocks.
Market structure adds another layer. Trading volumes typically decline in late December and early January as many professionals take time off. With fewer participants and lower liquidity, even modest buying pressure can send stock prices higher.
Finding the Strongest S&P 500 Stocks for a Potential Christmas Rally
If historic timing pans out, the Christmas rally could soon take shape in the S&P 500. With the index down nearly 2% so far this month, at around 1.86%, opportunistic buying and a catch-up effect could generate above-average year-end gains.
In this context, we used the Investing.com filter…
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