Future Focus: Should you hop on the Santa Claus Rally?
Is Santa’s sleigh really a gravy train?
Every December as the year winds down and financial headlines get a little more festive, we start to hear about the Santa Claus Rally. Some investors consider it a reliable seasonal pattern that tempts people into making tactical allocations in the hopes of catching a final burst of returns before the new year.
What actually drives the Santa Claus rally and how should long-term investors think about it? Especially those who want to stay focused on their goals rather than short-term noise.
The truth sits between historical data, behavioural nuance and focusing on what you are trying to achieve. Let’s unpack what the rally is, what drives it, what the numbers say and how this information can be used by long-term investors productively without falling into speculation
As always, the truth sits somewhere between historical data and behavioural nuance. This article unpacks what the Santa Claus Rally is, what might drive it, what the numbers say, and how investors can use this knowledge productively, without falling into speculation.
What is the Santa Claus Rally?
The term refers to a historical market pattern - especially in US markets - that tends to rise during the final trading days of December and the first few of January.
The Stock Trader’s Almanac defines it as the last five trading days of December and the first two trading days of January. Across decades, this short seven-day period has shown unusually strong average returns compared with the rest of the year.
Why does it happen?
There is no cut and dry answer but there are a few factors that are often cited as the reason.
Lower trading volumes during this period and reduced institutional activity: Many professional traders, fund managers and analysts take leave over this period. With fewer market participants, retail investors make up a larger portion of trading, potentially creating upward drift.
Seasonal optimism and consumer strength: December tends to be a strong month for consumer spending and sentiment often improves. A better mood doesn’t mean changing fundamentals, but it can change how investors react to news.
Portfolio rebalancing and tax considerations: As we see the ‘rally’ more pronounced in the US, some point to portfolio rebalancing and tax considerations that line up with the end of the tax year in the US.
The absence of major negative catalysts as corporate activity slows: Corporate news tends to slow dramatically in December and early January. There are no earnings updates or economic releases. The central banks aren’t making surprise announcements. Less information and announcements give markets fewer reasons to fall.
Most explanations revolve around sentiment, market structure or investor behaviour and not fundamental changes in markets.
What does the data say about the rally?
Santa has not delivered reliably every year yet there is a clear pattern.
According to a study by SmartAsset, since 1950, the S&P 500 has had a positive return during the last five trading years of December and the first two of the new year for 55 out of 70 years – 79% of the time. Over those 70 years, the S&P 500 increased by an average of 1.33% during the ‘rally’ period.
There are outlier years, such as in December of 2018 where markets rose meaningfully in one day in the US (Boxing Day). The chart below from Chartr shows the general trend of markets, where each day, the market moves between -1% and 1%. When we consider the average of 1.33% over the Christmas rally, it’s not an outstanding difference.
What investors are hoping for is that it is one of those outlier years, where they get a nice little bump up to their calendar year performance.
Ultimately, patterns are not a foolproof way to make portfolio decisions. However, if you are a long-term investor who has money to put into the market, December is as good a time as any, and historically better than some other months.
What you want to make sure is that you are not keeping cash out of the market for too long. Some investors delay deploying cash because they want to time the seasonal pattern. If the rally doesn’t materialise, they may end up investing at higher prices in January or waiting even longer for another opportunity.
It’s also folly to use this time to take short-term positions that don’t suit your goals. This is short-term speculation, something that numerous Morningstar studies show rarely succeeds over the long-term, even for professionals.
Other ways you can make 1.3%
Instead of relying on unpredictable markets, there are ways that investors can improve their returns by 1.3% or more.
Tax
Tax minimisation often gives you instant results. With tax effective investments and choices, you see the results in the same financial year while other techniques may only become apparent after years of compounding.
Investing in a tax effective vehicle like super could reduce your tax obligation by 32%. Investing in a company that offers a fully franked dividend could offer you a 30% credit. Investing in an investment property that offers negative gearing provides an average deduction of $8,702 (Property Council of Australia). These are the well-known ways of reducing your tax obligations and maximising your total real investment return.
Behaviour
Although we’re 0.1% off the mark here, this is a guaranteed return if you get it right. The latest edition of the Mind the Gap study estimates that the average dollar invested in managed funds and Exchange Traded Funds (ETFs) earned 7% per year over the 10 years ended December 31, 2024 (‘investor return’). That’s about 1.2% per year less than the funds’ 8.2% aggregate annual total return (’total return’) over the span assuming an initial lump-sum purchase.
That 1.2% ‘investor return gap’, which is explained by the timing and magnitude of investors’ purchases and sales of fund shares during the 10-year period, is equivalent to around 15% of the funds’ aggregate return.
Behavioural risks reflect our tendency as humans to act emotionally during volatility. We are driven by fear and greed, which is a formula for buying at the top of the market and selling at the bottom. Both individual and professional investors create elaborate models and theories designed to dictate when and why to buy or sell a security. Despite these models there is still a high probability that investors will panic when the market is going down and fear missing out on profits when it keeps climbing.
These actions have been shown to be to the detriment of the returns an investor achieves. This is the ‘behaviour gap’ that’s displayed in the study - the gap between an investment return and the return an investor gets in the same time period. Constantly switching between investments and assets due to emotional responses has been proven to reduce returns for the majority of investors.
This gap between the returns investors actually experience and reported total returns can be attributed to a few reasons - cash flow timing, costs and tax efficiency.
Lower fees
Lowering fees can cause a huge difference to your returns, especially over the long term. Focusing on cost-efficient options in your accounts, especially with managed investments like Exchange Traded Funds (ETFs) and managed funds will improve your end outcomes.
For example, let’s take an investor who has $100,000 invested over 30 years, adding $1,000 into their account each month. They achieve a 7% return. Option A is a fund charging 1% and Option B is charging 0.5%.
End outcomes:
Final thoughts
It’s helpful for us to understand the distortion in the normal investing environment when markets are quiet, sentiment driven or thinly traded. It adds context to market movements and can make us less nervous when volatility strikes.
A rally may happen in 2025/2026 – or it may not. Either way, investors that rely on seasonal patterns will struggle to invest over the long-term. Focus on the Chrissy pav and watching Love Actually for the 15th time – focus your investing decisions on your goals and stick to your investment strategy and long-term plan.
Invest Your Way
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