eResearch| The Santa Claus Rally Defined: Wikipedia defines the Santa Claus Rally as occurring during the last 5 trading days in December and the first 2 trading days in January, or 7 trading days in all. For 2021-2022, this would be from December 27 until January 4.
For this report, we are going to extend that period by one day at each end. That is because the U.S. exchanges observe different holiday days than do its Canadian counterparts. Thus, our Santa Claus Rally period runs from December 23 until January 5. This marks 9 trading days for the U.S. exchanges and 7 trading days for the Canadian exchanges.
Wikipedia quotes the 2019 Stock Trader’s Almanac, which states that the stock market has risen, on average, 1.3% during those 7 trading days going all of the way back to 1950. During these 7 trading days, the market has gone up 76% of the time.
This historic calendar effect is broadly attributed to one or more of the following postulations:
- Increased investor activity because of positive anticipation for the new year ahead;
- Lower trading activity from increased holiday vacations, which makes for greater volatility;
- The end of the tax-loss selling period and renewed confidence for the New Year; and
- Market pessimism, in general, is absent during the Christmas holiday period.
The 2021-2022 Rally Period
So, how did the latest Santa Claus rally fare this year?
As the following tables show, the Rally got off to a great start, then fizzled out as the period progressed, and ended up rather poorly.
Table 1: Major Indexes Closing Values, December 23, 2021 – January 5, 2022
Table 2 shows the daily percentage changes in these Indexes.
Table 2: Percentage Daily Changes, Major Indexes, December 23, 2021 – January 5, 2022
Observation: The table above shows a strong start to the Santa Claus Rally period in the first 2 trading days. Then, performance becomes a “mixed bag”, with more losing days than winning ones. The last 2 trading days were particularly weak.
Outlook
So, where do we go from here?
We believe that 2022 will be a much more difficult year for the markets. Our caution stems from our belief that, in 2022, corporate earnings, which are the backbone of market performance, are not likely to emulate the strong performance garnered in 2021. As a consequence, we think that it will be considerably more challenging to achieve excessive market returns.
Of course, there will be the usual sector rotation akin to the seasonality of market components. Readers are encouraged to read our monthly Seasonality Trends reports.
Historically, the stock market has performed well from October until May, and it usually does well in the Santa Claus Rally period and into January as Investors are filled with hope and positive expectations. Thus, the current “overbought” market may very well keep chugging along for a while, but we continue to believe that there will be a meaningful market pull-back this year.
Investors should remain cautious and consider taking profits when the opportunities arise or, certainly, when they become compelling.
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