The "Santa Claus Rally," spanning from December 24 to January 5, has historically delivered strong returns for investors. Since 1928, the S&P 500 has averaged a 1.6% gain during this period, with a 77% probability of rising (75 out of 97 years). Ari H. Wald, Oppenheimer's head of technical analysis, highlights that this performance sharply contrasts with typical seven-day periods, which average just a 0.2% gain with a 57% probability of rising. Moreover, when the Santa Claus Rally fails to materialize, market performance in the following one or two quarters tends to underperform. Wald notes, "Since 1928, the S&P 500 has averaged a 1% decline in the three months following a down Santa Claus Rally, compared to a 2.6% gain after a positive one." He also cites an old Wall Street adage: "If Santa Claus doesn’t come, the bear might."
Looking ahead to January, Oppenheimer analysts identify encouraging signals based on the index's position relative to its 200-day moving average. Since 1950, when the S&P 500 opens January above its smoothed trendline, it has averaged a 1.2% gain with a 64% probability of rising. Conversely, when opening below the trendline, it averages a 0.7% gain with a 50% probability. Currently, the index sits above this critical technical level.
Additionally, January has historically been the worst month for momentum factor (SPMO) performance, which tracks the past 12-month leaders versus laggards. December's outperformance often reflects tax-loss harvesting—selling losing stocks to offset capital gains taxes—which depresses momentum strategies in January as "previously underperforming stocks are repurchased." This phenomenon is known as the "January Effect," a popular theory suggesting U.S. stocks tend to outperform in January. Research shows January gains historically outpaced other months, particularly in small-cap stocks from the 1940s to the mid-1970s. However, this effect has diminished since the 2000s.
While widely accepted decades ago, most studies now focus on nuances and causes without definitive conclusions. Alternative theories include tax-loss harvesting in December, where investors sell losing positions to reduce tax liabilities, followed by reinvestment in January, boosting the market. Another behavioral theory suggests investors make financial resolutions at the start of the year, adjusting portfolios and driving prices higher. Many high-income investors also rely on year-end bonuses, providing fresh capital for January investments.
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