[Beginner's Guide] Is There Christmas in the Stock Market Too? ... Will the Santa Rally Come?

Editor's Note[Beginner's Guide to Stock Investing] is a smart investment guide for 'Joorini' (stock + beginner) investors. We will kindly and easily explain stock stories that are unfamiliar to beginners.

[Asia Economy Reporter Kwon Jaehee] Did you know that there is a Christmas in the stock market too?

Usually, a 'Santa Rally' comes around the end of the year and the beginning of the new year.

What does the Santa Rally mean, and will Santa visit our stock market this year? Let's find out.

What is a Santa Rally?

A Santa Rally refers to a phenomenon where stock prices show strength around Christmas, at the end and beginning of the year.

The term Santa Rally first appeared in 1972.

An economist named Yale Hirsch first used the term in his 1972 book, "Stock Trader's Almanac."

Hirsch studied the Standard & Poor's (S&P) 500 index for the last 7 days of the year from 1950 to 1971 and found that it rose by an average of 1.5% during that period.

He analyzed that "Santa appears every year on Wall Street, delivering a short but sweet and stable rally during the last 5 trading days of December and the first 2 trading days of January."

How does the Santa Rally work?

[Image source=Yonhap News]

So why does the Santa Rally happen?

There is no clear reason, but experts have suggested several common theories.

First, it is due to the holidays of institutional investors, who are major players in the stock market.

During this period, institutional investors stop short selling and reduce stock sales in the market, while individual investors, who tend to maintain more 'buy' positions than 'sell,' have a stronger influence.

Second, it is the activation of year-end consumption.

Year-end is a time when various bonuses are given, and people open their wallets ahead of the Christmas event.

This increases expectations for corporate earnings, which in turn influences stock buying sentiment.

Additionally, the year-end dividend effect of companies is also considered one of the causes.

Will Santa visit our stock market this year?

Looking back at the Korean stock market over the past six years, the Santa Rally occurred three times.

Specifically in 2016, 2017, and 2020.

Especially in 2020, it was called the best Santa Rally in 22 years, recording a significant rise.

The increase rate was as high as 10.9%.

It is considered the highest monthly increase rate since 1998.

So, will Santa come this year as well?

Opinions are divided, but the dominant view is that Santa is taking a sabbatical this year.

This is mainly due to remarks by Jerome Powell, chairman of the Federal Reserve (Fed), the central bank of the United States.

At the December Federal Open Market Committee (FOMC) regular meeting, Powell stated, "We will not consider lowering interest rates until we are confident that inflation is continuously moving toward the 2% target."

In other words, he declared that the current high interest rate environment will continue.

If the high interest rate environment continues, individual investors' financial situations will become tighter, consumption will decrease, and this will negatively affect the stock market.

There are even concerns that instead of a Santa Rally, a 'Satan Rally' might come.

A Satan Rally means a phenomenon where stock prices fall, opposite to the Santa Rally.

One factor fueling concerns is the possibility of a flood of sales from 'big individual investors' at year-end, as the capital gains tax threshold for major shareholders remains at 1 billion KRW.

Besides this, the bleak outlook for semiconductor stocks supporting our stock market and the fact that the Bank of Japan (BOJ), Japan's central bank, has also started raising interest rates are factors chilling investor sentiment.

The important thing is that there is no need to blindly trust the Santa Rally, nor to be discouraged if it does not come.

Even when the Santa Rally continued, there were times when the stock market crashed at the beginning of the year, and some stocks survive even during a Satan Rally.

At times like these, it is necessary to have the insight to distinguish the good from the bad stocks through study.

We end this article cheering for the wise investments of all Joorini investors today as well.

Merry Christmas to all!

This article is from [Beginner's Guide to Stock Investing], published weekly by Asia Economy. We explain not only stock-related financial news but also difficult economic stories in an easy and friendly way so that stock beginners can understand. Click subscribe to receive articles for free.

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