Is There Really a Santa Claus Rally?

There are so many investing maxims that it’s hard to know why anyone needs to do any research into stocks and bonds at all. I mean, how hard can it be to invest? Why do people put so much effort into it? At any time of year, there is a tried-and-true maxim to tell you where to invest your money right now.

Stock Market Sayings

*To the tune of Here Comes Santa Clause*

Here comes platitudes, here comes platitudes…

*End song*

The most famous Wall Street market saying is:

Sell in May, then go away.

It rhymes! It must be true.

The idea is that historically the market sort-of, kind-of, under-performs during the summer months. Of course, there are plenty of years where this isn’t true, especially now that Manhattan bankers don’t head for the country and stay there all summer long.

There’s also a Super Bowl Stock Market Indicator which says that if the team from the AFC Division wins the Superbowl, then the market will have a down year. Conversely, if the NFC Division team wins, then the market will have an up year.

My personal favorite is the Hemline Theory, or the Skirt Length Theory which suggests that if skirts are short, the stock market is going up for the year. If skirts are long, then the stock market is in for a down year. The idea is that when people (women) feel gloomy and fearful of the world, they wear long skirts, while exuberant, confident women would wear shorter skirts. Since confidence is good for consumer spending, short skirts = bull markets. (Note: Kilts are not technically skirts, and therefore not valid for the purposes of this market indicator theory.)

No word on whose skirts exactly since those on the runway aren’t always a perfect match for those on Main Street. Also, what is short and what is long tends to drift over time as well.

What Is Santa Claus Rally?

Contrary to what you might think, the Santa Claus Rally does not come in the run up to Christmas. Rather, the Santa Claus Rally occurs between Christmas (when the markets are closed) to New Year’s Day (when the markets are also closed). During this time, stock prices often rise.

There are numerous explanations for the Santa Claus rally. One is just that people are happy around holidays and, therefore, more likely to be bullish. Another theory is that various tax considerations cause more people to buy before the end of the year. Then, there is the idea that people invest their Christmas bonuses during that time. Of course, that explanation worked a lot better when more people got Christmas bonuses. The best explanation though, is that the Santa Claus Rally occurs when investors buy stocks in anticipation of the January effect.

What the January effect is, is an increase in stock prices during, you guessed it, January. The idea is that people who sold stocks to lock in capital losses during December for tax purposes, can buy back into the same stocks during January. (You must wait 30 days to buy the same investment as you sold if you want to claim to capital gain, otherwise, it’s called a Wash Sale and is not allowed by the IRS.) However, just like the summer, and the week in between Xmas and New Year’s, there are plenty of times where January has been a down month for the stock market.

The January Effect was in full effect for 2011, 2012, and 2013. But, before you rush out and dump Jimmy’s college fund into the market, you should probably know that January was a down month in 2008, 2009, and 2010. In other words, when the market is going down, it’s going down, and when the market is going up, it’s going up, even in January.

So, stay with me here. The reason the Santa Claus Theory works is because people are anticipating the next dubious investing theory and buying in. I didn’t major in philosophy, so I don’t know if that counts as circular logic, per se, but it’s certainly faulty logic somehow.