Adam Turnquist | Chief Technical Strategist

Key Takeaways  

• ‘Tis the season for the Santa Claus Rally! This historically strong seasonal period officially kicks off today and ends on the second trading day of January.
• While the Santa Claus Rally period has usually generated above-average returns during its short seven-day time window, it also correlates closely to January and following-year returns.
• When investors are on the ‘nice’ list, and Santa delivers a positive Santa Claus Rally return, the S&P 500 has generated an average forward annual return of 10.4%.
• However, when investors are on the ‘naughty’ list, and Santa delivers a negative Santa Claus Rally return, the S&P 500 has generated an average forward annual return of only 4.1%.

Today marks the first day of the Santa Claus Rally period. Yale Hirsch first discovered this unique seasonal pattern in 1972. Hirsch, creator of the Stock Trader’s Almanac, officially defined the period as the last five trading days of the year plus the first two trading days of the new year.

The Santa Claus Rally usually generates a lot of attention due to its historically strong market returns during such a short time frame. As highlighted in the chart below, the S&P 500 has generated average and median returns of 1.3% during the Santa Claus Rally period, compared to only 0.2% and 0.4% average and median returns for all rolling seven-day returns, respectively.

The Santa Claus Rally Historically Delivers Above-Average Gains 

S&P 500 Santa Claus Rally Returns (1950–2022) 

Source: LPL Research, Bloomberg 12/22/23
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90. 

Santa is on a Hot Streak 

If the S&P 500 finishes higher during this year’s Santa Claus Rally, it will mark the eighth consecutive period of positive returns. The longest streak was 10 back in the mid-1960s. However, as highlighted in the table below, positive returns during the Santa Claus Rally are relatively common, as the market has advanced 80% of the time during this period. For additional context, all rolling seven-day returns for the S&P 500 since 1950 have a positivity rate of only 58%.

S&P 500 Santa Claus Rally Returns by Year (1950–2022)

Source: LPL Research, Bloomberg 12/22/23
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

The Naughty or Nice List

One of the other primary aspects of the Santa Claus Rally seasonal period is that returns during this time frame have historically correlated closely to January and subsequent year returns. As Yale Hirsch stated, “If Santa Claus should fail to call, bears may come to Broad and Wall.” As illustrated below, historical returns give merit to his maxim, as the S&P 500 has notably outperformed in January and over the following year when investors make the ‘nice’ list, with Santa delivering a positive Santa Claus Rally return.

How Stocks Perform With or Without Santa Showing Up

Source: LPL Research, Bloomberg 12/22/23
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

Summary

The market is entering a unique seasonal period with strong momentum coming into year-end. Based on history, a positive Santa Claus Rally this year would be a good sign for a strong January and 2024. While negative Santa Claus Rally periods have historically been associated with underwhelming market performance over the following year, LPL Research believes there are plenty of catalysts for the market to offset potentially weak seasonality. As outlined in our Outlook 2024: A Turning Point, interest rate stability, the end of the Federal Reserve’s rate-hiking campaign, falling inflation, and improving corporate profits should support equities in 2024.  

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

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Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

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