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Santa Claus Rally

‘Tis the season to be merry and to contemplate either taking profits after a hard won rally in the US stock market this year, or hold on through December and see what Santa can deliver. There are many research and opinion articles on whether or not the ‘Santa’ effect actually exists, but a look at the data should clear things up, right?

Keeping it simple

At Tricio we pride ourselves on actionable investment ideas, we shy away from ‘ivory tower’ research that doesn’t really help real world investment decisions or solutions. So the idea of buying shares for a potential seasonal event doesn’t really work for us or our clients, given the 3-5 year investment horizon that many of us are looking at. However, for those wealth managers who are thinking of year end risk management, a look at previous experiences may be helpful. Looking at the S&P 500 Total Return index (dividends matter) since 1988 shows that on average a Santa rally gave a +1.49% return.

The parameters of this study were very simple. Take the closing index level at the end of December and calculate the percentage return from the closing level of the index at the end of November. The chart of the annual ‘Santa’ returns shows a mix of good years and bad years.

A different way of ordering the results can help put the returns into perspective. There are 4 years with negative returns in excess of -1.5%. There are 16 years with returns of over +1.5% in the sample period.

Hold on for the prezzies, but…

There are of course a lot of problems when looking at return data of a time series – the trend is your friend and all that. But on a simple look of trying to answer the question of whether there is a chance that the ‘Santa rally’ effect is real, one would tend to agree with the view that in the S&P 500 TR index there seems to be a decent chance that the index ends up higher at the end of December than it was at the end of November. For wealth managers of course, avoiding ‘churn’ in the portfolio and holding on for longer term returns is a big part of the investment process. In theory the ‘Santa effect’, if it is real, should not really be part of their thinking. However, as we approach year end and the ‘itch’ of window dressing or avoiding a 2018 end of year event comes up in meetings, it may help to know that on average, things work out ok over the holiday period.

Gerry Celaya

Chief Strategist


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