Definition
The term Santa Claus rally refers to an increase in financial markets during the month of December. The Santa Claus rally is one of several market movements attributed to investor psychology rather than fundamental improvements in the market's outlook.
Explanation
Financial markets, such as commodities, bonds, and stocks, typically demonstrate an upward or downward trend over time. The Santa Claus rally states financial markets in general, and stocks in particular, typically increase in the month of December.
While most scholars argue the Santa Claus rally is based on investor sentiment, rather than fundamental improvements, there are a number of other explanations for this phenomenon:
Investors completing trades before the end of the year to take advantage of benefits offered via the federal income tax code.
Fund managers window dressing their portfolios with securities that performed well during the calendar year.
Companies distributing holiday bonuses to their employees, which are subsequently used to purchase common stock.
A more optimistic outlook among investors, as the holiday spirit takes hold.
Empirical evidence suggests December is the most lucrative month for investors. Over the 50-year period from January 1960 through December 2009, the S&P 500 Index provided investors with a 1.44% return in the month of December, the largest of any calendar month.
Related Terms
January effect, gray swan event, technical rally, tortoise rally, October effect
