As the holiday season approaches, we thought it would be fitting to explore the seasonal effects that occur around the end of the year and the start of the new one. Specifically, we’ll examine the Santa Claus Rally, the typical returns in December, and the January Effect. To assess these phenomena, we’ll analyze a few major indexes: the S&P 500, the Russell 1000 Value & Growth Indexes, and the Russell 2000 for small caps. This will help us determine if these seasonal patterns are more pronounced in certain stock groups than others.
The Santa Claus Rally
The Santa Claus Rally refers to the tendency for stock prices to rise during the last five trading days of December and the first two trading days of January. Various theories attempt to explain this phenomenon, including:
Increased holiday shopping.
Optimism and seasonal joy on Wall Street.
Holiday bonuses being invested in the market.
Institutional investors taking vacations, leaving bullish retail investors in charge.
Our lighthearted theory: holiday indulgence in spirits leads to overconfidence and bullish bets.
While the true cause remains unknown, historical data shows this seven-day period has delivered higher stock prices 79.2% of the time, according to Investopedia. We’ve broken down the numbers ourselves since 1979.
Interestingly, this seasonal anomaly has significantly eroded over the past decade across most U.S. indexes. However, it seems to persist within value stocks, potentially due to investors hunting for bargains after their holiday spending sprees. Unfortunately, quirks like this tend to fade as traders exploit the opportunity, causing it to disappear.
December and the January Effect
The January Effect, a theory dating back to the 1940s, suggests that stocks—particularly small caps—perform better in January, especially in the first few trading days. Explanations for this trend are similar to those proposed for the Santa Claus Rally: holiday optimism, bonuses, and a fresh start to the year.
To test this theory, we examined historical data, summarized in the table below.
The results show that while January does outperform the average monthly return for every major index we reviewed, so do other months, such as April, May, and November. Over time, January’s historical edge has diminished, with outperformance redistributed to other months. For instance, December has outperformed January consistently over the last 40+ years. Curiously, November stands out as the clear winner, with no other month coming close in terms of returns. On the other hand, February and September are notably poor months for investors, perhaps reflecting post-holiday winter fatigue and the return to routine in the fall.
Takeaway
While seasonal investing patterns are intriguing, they shouldn’t play a central role in your investment decision-making process. These topics are fun to discuss during the holidays, but as seen with the January Effect and the Santa Claus Rally, such patterns may not repeat reliably. What’s clear from historical data is that whatever edge these strategies once held has largely disappeared over time.
Enjoy the holiday season, and remember to focus on sound, evidence-based investment strategies for long-term success!
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Modelist Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.