The stock market gains momentum between Christmas and New Year’s Day. This phenomenon, called Santa Claus rally, would occur almost four years out of five. Too good to be true ? Probably, and here’s why.
The event was first identified in 1972 by Yale Hirsch, financial analyst and founder of the Stock Trader’s Almanacsaccording to the financial information site Investopedia. The “rally” corresponds to a positive performance of the stock markets during the last five working days of the year on the stock market and the first two days of January.
According to recent calculations by theAlmanac, the value of the S&P 500 index has increased 58 times during this interval between 1950 and 2022, or almost eight years out of ten. The average gain was 1.4%.
“This is what we call a calendar effect,” explains Jean-Philippe Tarte, lecturer in the Department of Finance at HEC Montréal and specialist in stock markets. “It falls into a broader category of market anomalies. And the great challenge of anomalies is trying to explain them. »
Santa Claus or taxes?
Moreover, there is no shortage of attempts at explanations. In an article published last November, the magazine Forbes reported several possible causes, although not necessarily proven: increases in consumer spending during the post-Christmas sales, reduction in institutional activities on the market, New Year’s resolutions, self-fulfilling prophecy…
“There is still a real structural phenomenon generating this market anomaly, which is the end of the year. Not because the planet has just completed its tour of the Sun, it is rather that the end of the financial year takes place at that time,” explains Philippe Goulet Coulombe, professor in the Department of Economic Sciences at UQAM.
By selling securities that have lost value during the year, investors can reduce the gains generated by other securities that have appreciated. The objective of the maneuver is to reduce the tax payable on capital gains. The depreciated securities that were sold in December would be seen as a bargain by some investors who, by purchasing them, would put upward pressure on their price.
A “rather tenuous” explanation, according to Jean-Philippe Tarte. According to him, the main reasons for the rally are more of a behavioral nature. He mentions the animal spirits, an expression used by the economist John Maynard Keynes (1883-1946) to explain the influence of emotions and instinct on human behavior, to the detriment of rationality. “It would be more the spirit of the holiday season, which makes investors more optimistic,” continues Mr. Tarte.
“I think there is also a buzz effect because the anomaly is known,” adds Philippe Goulet Coulombe. “After that, there are other phenomena. At the end of the year, people receive their bonus and they will tend to want to reinvest it,” he explains. An influx of money into the stock market could indeed boost it, but the proof remains to be done.
Attention !
Professor Goulet Coulombe mentions the absence of serious and exhaustive scientific literature on the rally, enough to put stock marketers on notice. The occurrence of the phenomenon is not guaranteed and its causes are far from clear.
“If we are certain that the Santa Claus rally is going to happen, what do we do? We put our money into the stock market right away, before other people start buying the assets and prices rise. But if everyone thinks that you and I are going to do this, they’re going to do it before us. »
Which makes Mr. Tarte say that “the minute we find the true and good explanation why there is an anomaly in the market, by definition, this anomaly should disappear.” In other words, if it is obvious that the rally is going to occur, it will be internalized by the stock market.
The experts consulted also agree that it would be very risky for individuals to try to benefit from the phenomenon, especially in the short term.
“What happens a quarter of the time it doesn’t work as well? » asks Philippe Goulet Coulombe. “If three times out of four, it goes up a little, and the time out of four where it doesn’t go up, it goes down dramatically, in expected value, it’s better not to change your position. »
In short, there is no certainty about what will happen this year during these seven days. But nothing stops you from asking Santa for help.