Santa Claus Is Coming to Town—Or Is He?

Christmas may still be five weeks away, but it’s starting to look a lot like Christmas everywhere you go.

After the craziness of 2020, Main Street and Wall Street alike are looking forward to a little holiday cheer. Stores filled with the typical red and green holiday decorations, snowflakes, and trees back in October, and Christmas music now greets you as you enter any retail location. A lot of people have followed suit, looking to ignite the holiday spirit early this year by decorating their homes already.

You may have also noticed that Wall Street is in a more positive mood recently. The S&P 500, Dow, and NASDAQ have rallied an impressive 10%, 12%, and 9%, respectively, in November so far. Given the stock market’s surge in November, many investors are now wondering if the “Santa Claus Rally” is real and if it started early this year, too.

So, today, let’s consider - what exactly is the Santa Claus Rally and will the jolly man himself make an appearance on Wall Street this year?

As you probably already know, the Santa Claus Rally is what most traders and investors call the seasonal strength that typically accompanies the holiday season. But here’s what’s interesting: the Santa Claus Rally historically doesn’t occur before December 25.

Given that Santa Claus is extremely busy in the weeks and days leading up to Christmas day, it’s not too surprising that the Santa Claus Rally occurs after the holiday. In fact, according to stock market analyst Yale Hirsch, who first dubbed the phenomenon back in 1972, the Santa Claus Rally takes place in the trading days following Christmas day and into the first few trading days of the New Year.[1]

Trading volume is typically light in the days between Christmas and New Year’s, as most of Wall Street is on vacation and celebrating the holiday season with family and friends. As a result, “naughty” or “nice” news can easily drive the stock market lower or higher. Typically, though, the news is “nice” and the market trades higher during these six days.

As you can see in the chart below, the S&P 500 has historically climbed higher during the Santa Claus rally timeframe. Since 1950, the S&P 500 has tacked on an average 1.3% gain during the final days of the year and into the first few days of the New Year.[2] Interestingly, in 2019, the S&P 500 only gained 0.36% between December 25 and January 3.

[1] https://www.investopedia.com/the-santa-claus-rally-4779941

[2] https://www.cnbc.com/2019/12/20/official-santa-claus-rally-period-begins-next-week.html

Fast forward to 2020… will we experience a Santa Claus Rally this year? A lot of market pundits are banking on Santa Claus making an appearance on Wall Street by year-end for a few reasons.

First, the Presidential election uncertainty should no longer be hanging over Wall Street. Yes, there are still the runoff elections in Georgia in January, but a divided U.S. government looks like a foregone conclusion—and Wall Street loves gridlock. (For more insights into what a divided government means for the stock market, check the November 13 article, “A Divided U.S. Government—Who Wins?)

Second, there are a few COVID-19 vaccine candidates that will likely land on the FDA’s desk in the coming weeks. Both Pfizer and Moderna recently announced that their vaccine candidates have shown a more than 90% effective rate. Both companies expect to file for emergency use authorization. The prospect of a vaccine approval by year-end is creating a lot of optimism that we may finally be nearing the end of the global pandemic.

And third, the U.S. economic recovery persists, albeit at a slower pace with rising COVID-19 cases driving some states to re-impose restrictions ahead of Thanksgiving. As an example, retail sales increased by 0.3% in October, with online sales soaring by 3.1%. While that’s down from the 1.6% rise in September, it was the sixth-straight month of gains.[1]

So, with more optimism spreading throughout Wall Street, many believe that Santa Claus will come to town this year. Some investors are even making changes to their portfolios to account for the possibility of a year-end rally. But if you’re considering a shift in your portfolio for a short-term event like a Santa Claus rally, “you better watch out.”

Quick decisions based on short-term events can have long-term consequences. That’s why at Nicollet Investment Management, we encourage our clients to stay focused on their long-term goals and to stick to their financial plan. Give us a call today and we’ll review your portfolio to ensure that you’re on the right path to help you achieve your financial goals in the New Year.

[1] https://www.wsj.com/articles/us-economy-october-retail-sales-coronavirus-recovery-11605561529