We don't know about you, but for us, the holiday season means holiday traditions.

The "Santa Night" party. 

Fighting over whether we'll watch Christmas movies or bowl games. 

9 a.m. mimosas while opening presents. (Hey! It's always 5 o'clock somewhere. In this case, that somewhere is *checks notes* Istanbul.)

And, at least over the past few years, writing about the "Santa Claus rally."

The Tea

Not to play fortune-teller, but I can pretty much guarantee that over the next month or so, you're going to be bombarded with stories about three market topics:

• What the new presidency will mean for stocks (already under way)
• Stock market outlooks for 2025
• Will Wall Street see a Santa Claus rally?

That last part is near and dear to our hearts, in large part because it's a rare instance of Wall Streeters letting their freak flag fly. Financial-industry types aren't exactly what you'd call whimsical … but every now and then, they get a little playful in the workplace.

WealthUp Tip: 'Tis the season for charity, too! Here's how to give stocks as a gift in a tax-efficient way.

As I said a few years back when I was heading up investing coverage at Kiplinger:

"Experts, amateurs and idiot savants alike have forever gone to great lengths to divine the direction of share prices. Just as the ancients studied the entrails of sheep, today's would-be market prognosticators have looked for auguries in shades of lipstick, the production of cardboard boxes, Big Mac prices, the lengths of women's skirts and the cover of the Sports Illustrated Swimsuit Issue."

Add to that "sell in may and go away" and the Super Bowl Indicator, and … well, you get the point.

So, what exactly is the Santa Claus rally?

The definition of a Santa Claus rally can actually vary depending on who you're talking to. 

Some people, for instance, loosely define it as any rally that happens in and around Christmas. Others vaguely wave their hands and call it November and December. Though, the month of December itself is a fairly popular interpretation, and on that front … well, clearly something works.

Source: LPL Research, Bloomberg, Factset 11/29/24

"December overall is the second-best performing month since 1950 with a 1.6% average gain, behind only November, and is the third strongest over the past five years (behind November and July)," says George Smith, Portfolio Strategist for LPL Financial, the nation's largest independent broker-dealer. "When studying the proportion of positive monthly returns since 1950, December often delivers a present to investors with the highest proportion of positive monthly returns, at around 74%."

But Stock Trader's Almanac creator Yale Hirsch, who discovered this seasonal pattern in 1972, defined it as the last five trading days of the year, plus the first two trading days of the new year. This year, for instance, if a Santa Claus rally were to take place, it would be measured between Tuesday, Dec. 24, and Friday, Jan. 3.

We view that as the most faithful measure, and it's a winner, too. Between 1969 and 2023, the seven-day Santa Claus rally period ushered in a 1.3% return, on average, for the S&P 500. That's on par with (or better than!) the average historical gain for nine of the calendar's 12 months.

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So, the fact that the Santa Claus rally "works" is established. But the "why"? Not so much.

Some people chalk it up to optimism over the strongest retail season of the year—but you could argue that's merely seasonal trends that should already be baked in, and this would also have less effect during the after-Christmas trading days. Other people chalk it up to year-end transacting as institutional investors (especially fund managers who want to put a little window dressing on their holdings by purchasing whatever's been working) put a wrap on their records for the year. 

And still others say it's just festive holiday vibes taking hold. Don't dismiss that outright—the stock market isn't emotionless.

Regardless, it's important to remember that the Santa Claus rally isn't an annual tradition etched in stone. It's a set of data averaged over time. It's a fruitful average, mind you, but no one should go into the holiday season thinking stock-market gains are a given.

"Not every December is one to remember," says Gene Goldman, Chief Investment Officer of Cetera Investment Management. "In 2018 and 2022 the stock market closed out the year with sharp December declines of 9% and 5.8%, respectively."

But Goldman reminds us even those instances weren't all bad news: "A strong market rebound followed in both cases—the S&P 500 generated a total return of 31.5% in 2019 and 26.3% in 2023."

The Take

Just as I said last year, the top-of-mind question people have when it comes to the Santa Claus rally is "Will Saint Nick come again this year?"

And just as I always say when it comes to any prediction about the stock market, the answer is "Nobody knows." But market strategists and other experts do have a few thoughts on what might come to pass. 

Is Santa's Sleigh on the Way?

Ryan Detrick, Chief Market Strategist at advisory firm Carson Group and shameless Cincinnati Bengals apologist, points out a few historical signals that bode well for the coming month.

For one, "when the S&P 500 was up 20% or more for the year heading into the final month, December has been up nine of the past 10 times," he says. 

This year? The S&P 500 put up a 25.5% return through the end of November.

Source: Carson Investment Research, FactSet 11/24/2024

Detrick also notes in his blog a stat from Fundstrat founder Tom Lee: "When the S&P 500 was up at least 10% at the midpoint of an election year, December has never been lower."

Lastly, Detrick points out that election years tend to enjoy a lift in the final weeks. Specifically, December has been positive in nine of the past 10 election years:

Source: Carson Investment Research, FactSet 12/2/2024

But again, these are just statistical averages—there's no guarantee that November's election results will propel stocks through the rest of the year.

"Finally, the road looks clear for a Santa Claus rally, but modest caution is warranted," José Torres, Senior Economist at Interactive Brokers, warned in late November. "At the same time, we move toward inauguration day, as the GOP's upcoming majority control in Washington coincides with upticks in policy uncertainty and geopolitical turbulence."

A common theme in much of the Santa Claus commentary sent to us this year is an acknowledgement that while great returns leading up to December are historically bullish for the month, stocks really have taken off—in addition to the S&P 500's 25.5% gains through Nov. 30, the Dow Jones Industrial Average returned 21%, and the tech-heavy Nasdaq Composite shot up nearly 29%.

In other words, it's possible that Santa has arrived ahead of schedule … and that further gains might be a tall ask.

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Yet even then, no one wants to bet against Kris Kringle, either.

"A further rally could develop from here but by most accounts it appears that Santa has come early again this year," says Scott Wren, Senior Global Market Strategist at Wells Fargo Investment Institute. But he adds: "We believe positive momentum and better-than-expected economic news suggest that now is not the time to try and step in front of what is likely to be a gift-laden sleigh when Santa eventually comes to town later this month."

Should You Really Be Looking to Santa to Make Investment Decisions?

I would argue that the most pertinent question to ask yourselves isn't "Will Papá Noel slide down Wall Street's chimney this year?" but instead "Should I care?"

If you're a professional investor, day trader, or anyone else that makes a lot of short-term market moves, then yes, you should care. The Santa Claus rally should at least be a consideration as you evaluate opportunistic probabilities through the end of 2024 and the beginning of 2025.

But should you care if you're a regular ol' buy-and-hold investors like us?

I've been surrounded by market experts for more than a decade, and one of the first, best, and most frequently offered pieces of advice I've ever received is not to trade seasonal trends. Even professional investors have difficulty timing the markets—the chances of your average Joe doing it well are pretty low.

Last year, I asked Thomas Cole, the CEO and co-founder of ETF provider Distillate Capital, to weigh in on the Santa Claus rally.

His response?

"Our advice is to ignore it."

WealthUp Tip: Non-stock investments don't follow seasonal trends like the stock market does—they march to the beat of their own drum.

I wish I could say that was all of his response—that he flippantly brushed it off. I'd have had a good laugh. But Cole thoughtfully continued:

"Unfortunately, it causes investors to do the wrong things at the wrong time. We much prefer to see our investors get involved and stay involved. The short-term game is entertaining, but transacting in it is extremely difficult and more likely to leave you behind than make money for you."

Translation: If you're already invested, the Santa Claus rally will lift your boat anyways. You don't need to do anything other than kick back, take a sip of cocoa, and stick to your plan.

Riley & Kyle

WealthUp

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