A Santa Claus Rally, For Real?

by Tim Parker

Investors are taught never to use hope as a reason to invest, but after 2011 has left the majority of professional money managers lagging the market, there is still, albeit fading, hope of an upcoming Santa Claus rally.

Even with the SPDR S&P 500 (SPY) down another 1.06% on Wednesday, there is still time for a turnaround in the next two weeks.

So just what is a ‘Santa Claus Rally’ and what does it mean for your portfolio? (For related reading, see The Frosty, Festive World Of Investing.)

What Is It?
If there is an academic explanation that explains a Santa Claus rally, it would be a strong move to the upside that occurs between Christmas and the New Year. There are as many explanations for this rally as there are lights on a Christmas tree, but some of the more common include the euphoria of the holiday season and excitement about the New Year, positioning portfolios for maximum tax benefits, and the absence of some of the market’s more pessimistic traders who are still on vacation.

This year, the Santa Claus rally has been extended. On November 28th and 29th of 2011, when the S&P 500 added more than 3%, financial media including CNBC, called it the beginning of the Santa Claus rally. It seems that Santa is expected to come earlier this year.

Show Me the Facts
If the Santa Claus rally is real, the facts should support it, and according to Bespoke Investment Group, they do. Going back to 1990, December has seen average returns of 2.02% with positive returns 81% of the time. In the past 100 years, the average December return is 1.39% with positive returns 73% of the time.