Christmas 2022 may be over, but talks of Santa live on. In the investing world, the end of December and start of January continue to be dominated by St Nick in the form of a potential Santa Claus rally.
But what is a Santa Claus rally, and what does it mean for investors?
Santa Claus rally: a definition
Historically, the stock market has risen over the last few days of the trading year and the first few days of the following year. It’s often described as a seven-day phenomenon, but definitions can vary from source to source.
But why does this phenomenon happen? There are multiple potential reasons: a sense of optimism driven by the Christmas period; the investment of holiday bonuses; investors looking to move or invest assets for tax purposes.
Another theory is that many major institutional investors – who tend to be more pessimistic than retail investors – take time off over the festive season, leaving the market to be driven by their more optimistic retail counterparts.
How to trade the Santa Claus rally
Patterns from 1994 reveal that how stocks behave during a Santa Claus rally can normally predict how they will perform in the year to come. As a result, many investors choose to use this time to decide on how they plan to invest in the year ahead. Others take a more aggressive approach, making short-term decisions to try and gain immediate returns on market performance (if a rally occurs).
How investors behave in the presence – or absence – of a Santa Claus rally will depend very much on their investment goals, their investing style, and the level of risk that they are willing to take.
Has there been a Santa Claus rally in 2022-2023?
Speaking in late December 2022, Patrick O’Hare, analyst at Briefing.com, stated, “Checking in on Santa Claus, he hasn’t left the building but he seems somewhat stuck in a revolving door.” With interest rates rising, the likelihood of a recession looming and inflation fears across the globe, industry experts believe that investors are showing little appetite for riskier assets.
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