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What a Santa Claus rally means for investors

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Santa Claus attends the 98th Annual Christmas Tree Lighting Ceremony at the New York Stock Exchange on December 1, 2021 in New York City.

Bryan R. Smith | AFP | Getty Images

If history is any guide, stock market investors might be about to get a holiday giveaway.

US equities often surge late in the year, offering higher returns to investors. The trend, known as the “Santa Gathering”, encompasses the last five trading days of the calendar year and the first two of the new year.

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Over the past two decades, the S&P 500 Index — a barometer of U.S. stock performance — rose 0.7% a year, on average, over those seven trading days, according to FactSet data. The S&P 500 has been positive for those seven days in 15 out of 20 years — or 75% of the time, FactSet found.

The trend also holds when looking further afield.

During this particular seven-day trading period, the S&P 500 has risen an average of 1.3% per year since 1950 and has been positive for 79% of those years, according to analysis by Michael Batnick, managing partner at Ritholtz. WealthManagement.

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By comparison, returns for the S&P 500 were a much lower 0.24% in every other seven-day trading period dating back to 1950, Batnick said. Stocks were positive 58% of the time during these periods.

“It’s significant,” Batnick said of the difference in yields and positivity rates.

December tends to be among the strongest months of the year for US equity performance. Since 1926, only the July and April returns have exceeded the December average — about 1.9% and 1.7% versus 1.6%, respectively, according to data from Morningstar Direct.

It’s a bit unclear why the Santa Claus rally exists

Why stocks typically rally in December and January isn’t entirely clear. Possible contributors include optimism about the year ahead, vacation spending, securities traders on vacation, and institutions squaring their books — even holiday spirit.

“When you think of a Santa gathering, it’s all about anticipating or looking ahead,” said Terry DuFrene, global investment specialist at JP Morgan Private Bank in New Orleans. “Now you have a chance to hit the reset button.”

Ed Yardeni, president of Yardeni Research, told CNBC that Santa Claus rallies are “particularly predictable and strong” during midterm election years, which often provides a tailwind to the stock market — and usually no matter what. party takes control of the House or Senate.

“The midterm elections, whatever happens, tend to be very optimistic, and the Santa Claus rally continues over the next three, six, 12 months,” he said.

Markets will have Santa rally thanks to mid-term tailwind, says Ed Yardeni

The market generally reacts positively to a divided government because of the relative predictability that accompanies legislative gridlock. Republicans took the House and Democrats retained control of the Senate in this year’s midterm elections.

Whatever the reason for Santa’s rally, investors can enjoy good news.

The S&P 500 is down about 17% in 2022. Bonds, usually a ballast when stocks are down, have also been in the doldrums; the Bloomberg US Aggregate bond index, a barometer of US bonds, is down 11% in 2022.

Of course, past performance does not mean that any given stock will rebound.

The Federal Reserve is set to continue its interest rate hike cycle at a policy meeting next week. The central bank began aggressively raising borrowing costs in March this year to tame stubbornly high inflation.

On Tuesday, Americans will see if inflation has eased further in November, when the US Bureau of Labor Statistics releases its latest monthly Consumer Price Index report.

A bigger-than-expected rise in interest rates or signs of higher-than-expected inflation could fuel equity market jitters toward year-end.

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