[Seungseop Song's Financial Light] The 'Financial Santa' Who Comes Every Year-End

Yale Hirsch, 1950-1971 Stock Market Analysis
S&P 500 Index Rises 1.5% After Christmas
"No Santa Call Means a Bear on Broadway"
Year-End and New Year Optimism Boosts Investor Sentiment
Invest Wisely with Personal Responsibility, Not Blind Faith

Editor's NoteFinance is difficult. Confusing terms and complex backstories are all tangled together. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, a foundation of financial knowledge is essential. Therefore, Asia Economy selects one financial issue each week and explains it in very simple terms. Even if you know nothing about finance, you can immediately understand these ‘light’ stories that turn on the bright ‘light’ of finance.

A person dressed as Santa Claus visiting the New York Stock Exchange, with internal staff smiling. Photo by New York Stock Exchange Social Networking Service (SNS)

[Asia Economy Reporter Song Seung-seop] As the year-end approaches, expectations for a ‘Santa Rally’?a rise in stock prices?are growing. With the U.S. stock market performing well, there is hope that the domestic stock market will also experience a boom. We will explain exactly what a Santa Rally is, whether historically stock prices have really been good at year-end, and if so, what the causes are.

"If there’s no Santa Call, a bear comes to Broadway"

A Santa Rally refers to the phenomenon where the stock market rises during the last 5 trading days of the year and the first 2 trading days of the new year. Recently, regardless of the economy or outlook, the stock market enjoys a boom for these 7 days. It is called a Santa Rally because it starts around Christmas. This year, the Santa Rally period is from December 26 to 30 and January 2 to 3.

The term Santa Rally was first used by economist Yale Hirsch in 1972 in his book “Stock Trader’s Almanac.” Hirsch studied the S&P 500 index during the last 7 days of the year from 1950 to 1971 and found that it rose by an average of 1.5%. According to Bank of America, the average return during the Santa Rally period since 1928 is 1.68%. Considering the short period of 7 days, this is a very unusual phenomenon. Historically, December has been the best month for the stock market.

Hirsch believed the Santa Rally was an important indicator to infer market conditions early in the next year. He also famously said, “If there’s no Santa Claus rally, a bear will come to Broadway.” Broadway refers to the New York Stock Exchange, one of the world’s leading capital market locations. A bear is an economic term meaning a downward trend in the stock market. He argued that if a Santa Rally is not observed, stock prices will fall early next year.

Year-end and New Year’s buoyant hopes stimulate investor sentiment

A representative Santa Rally occurred during the 2008 financial crisis. Although the entire year was a bear market and the stock market was poor, the S&P 500 index rose 7.5% during the Santa Rally period. After the 2009 Santa Rally, the U.S. stock market immediately plunged. In Korea, the 2020 Santa Rally is notable. It is called the best Santa Rally in 22 years. On the last trading day, the 30th, the KOSPI closed at 2873.4, which was 10.9% higher than the previous month. It was the highest monthly gain since 1998.

There is no clearly established reason why Santa Rallies occur. However, experts speculate several causes. First, major institutional investors usually take a week off after Christmas. They stop short selling and reduce stock sales in the market. The influence of individual investors relatively increases. Individual investors tend to have a stronger buying tendency than institutional investors. Empowered individual investors may be driving the stock market up.

Optimism is also cautiously cited as a cause. Among the factors that determine investment decisions, irrational elements certainly exist. The hopeful and bright feelings brought by Christmas and the New Year encourage easy investments. Especially, if many people who believe in the Santa Rally enter the stock market en masse without any particular reason, stock prices can actually rise. This is why some economists criticize the Santa Rally as a ‘self-fulfilling prophecy’ or ‘superstition.’

There is also an analysis that more disposable money becomes available. At year-end, more people receive bonuses and rewards. That means many people exchange money. Whether small or large amounts, money to invest in stocks is generated. Increased consumer spending around the holidays is also a positive factor for a bull market.

Expectations for Santa Rally on Fed Chair’s remarks... but negative outlooks remain

Jerome Powell, Chairman of the U.S. Federal Reserve

Opinions are divided on whether the Santa Rally will continue this year. There is certainly hope for a Santa Rally. On the 30th of last month (local time), Jerome Powell, Chair of the U.S. Federal Reserve (Fed), said, “We will not lower interest rates at an early stage,” but also said, “We do not want excessive tightening.” If the pace of interest rate hikes slows, it acts as good news for the stock market. Investment sentiment for risky assets revives, leading to a market rebound.

However, there are also negative views. Powell’s remarks only mean that rates will not be raised excessively, but the stance to continue raising rates remains. There are many adverse factors. The war between Russia and Ukraine continues, and in China, protests demanding President Xi Jinping’s resignation persist. When major countries’ systems are shaken and unstable, investment sentiment worsens, increasing the likelihood of a stock market slump. Domestically, the unresolved Financial Investment Income Tax (Gold Investment Tax) bill is also a hindrance.

The important thing is not to blindly trust the Santa Rally. There have been years when the stock market did not perform well during the Santa Rally period. There was no Santa Rally in 1993, 1999, 2004, 2007, 2014, and 2015. During the 2007 Santa Rally, the S&P 500 index fell by more than 2 percentage points. There are also cases where the stock market crashed early in the year despite the Santa Rally. Blind investment can lead to huge losses. Rather than investing blindly based on the Santa Rally, one should remember the principle of personal responsibility and invest wisely.