Yes, Virginia, Santa has year-end rally on sleigh
Studies show investors are more optimistic heading into holiday Over the last century, the stock market has risen an average of nearly 80% of the time over the period from two days before Christmas through the first week of January.
Is the celebration of Christmas the key to often robust year-end stock market returns?
Historians have long known that the U.S. stock market tends to be an above-average performer in late December. Over the last century, the stock market has risen an average of nearly 80% of the time over the period from two days before Christmas through the first week of January. Though that’s still short of a 100% guarantee, it’s far better than the 56% odds of rising across all other periods of the same length.
Tantalizing evidence that Christmas may have something to do with this year-end strength emerged when researchers analyzed the several-century history of various countries’ stock markets. Ben Jacobsen of the TIAS Business School in the Netherlands and Cherry Zhang of the Nottingham University Business School China found year-end seasonal strength became more pronounced in the U.K. around 1835, which is when Christmas became a public holiday in that country.
They found further evidence in the U.S. Christmas didn’t become a public holiday until around 1870, when year-end seasonal strength in the U.S. stock market became more pronounced.
If the Christmas holiday is indeed one of the causes of this strength, then we would expect abnormal market strength to appear at other times of the year in countries that celebrate nonChristian holidays. And, sure enough, that appears to be the case, according to the study “Cross-Cultural differences in seasonality” by two professors at the American University of Sharjah in the United Arab Emirates, Jorg Bley and Mohsen Saad.
For example, they found no discernible stock market pattern around Christmas time in many Islamic countries’ stock markets — but above-average performance around the time of Eid alFitr, the celebration marking the end of Ramadan.
One likely explanation is that, around holidays, investors are more optimistic and therefore buy more stocks. Evidence supporting this possibility comes from my four decades of tracking the performance of several hundred investment stock market timers in the U.S. I found them to be much more bullish in December than the rest of the year.
For example, their average recommended exposure to the U.S. market in December is 50.4%, six percentage points higher than the 43.4% average equity allocation across the other 11 months. This difference is significant at the 95% confidence level statisticians often use to determine a pattern is genuine.
If you’re a short-term trader wanting to bet this pattern will appear again this year, place your bets by the close of trading on Dec. 21. That way you will benefit from the abnormal strength that, historically, has begun two trading days before the stock market’s Christmas holiday. You would then hold those bets until the first week of January.
Awareness of year-end seasonal strength is useful even if you’re a longer-term investor. For example, if you were planning for other reasons to invest additional money in the stock market in coming weeks, you might want to do so soon — and benefit from expected year-end strength. Similarly, if you were going to be pulling some money out of the stock market anyway, you’d want to wait until after the first week of
January to do so.