Yahoo Finance 61% surge: What the 'Santa rally' means for stocks
If you haven’t already heard, the Dow Jones has broken past the 30,000-point mark for the first time in history.
Global stock markets have come a long way since the March crash: since then, most indices have been on a bull run, buoyed by hopes of a coronavirus vaccine as well as Joe Biden’s election win.
You can expect the good news to keep coming. At the end and beginning of every year, stock market experts observe something that’s called a ‘Santa rally’ or the ‘Christmas rally’.
Since 1969, the Santa rally has yielded positive returns for 34 of the last 45 holiday seasons in the final five trading days and first two trading days of the year, the Stock Trader’s Almanac states.
This year is expected to be one of the best years yet.
“The ASX200 is already in record territory for November. We have never had such a strong rally in November, ever,” Bell Direct market analyst Jessica Amir told Yahoo Finance.
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It’s a nice Christmas gift to stock traders, she added.
“If you only invested each November to January for the last 25 years, you would have made 61 per cent.”
With the pandemic arguably under control in Australia and cooling in parts of the world, travel restrictions are being eased, shops are reopening, interest rates are at record lows and businesses are getting a leg up from governments in the form of tax cuts and asset write-offs.
Not only this, but three Covid-19 vaccines are over 90 per cent effective, Amir added.
“Investors are factoring this all in … [and] buying into those parts of the market that look cheap and are likely to recover.
“They’re buying into banks as we’ll be saving and spending more, more, they’re buying consumer facing stores and shopping centres, they’re also buying oil companies, airlines and travel businesses.”
How did the Santa rally begin?
While the rally is typically concentrated between Christmas and New Year, it tends to start in November and run into January, says AMP Capital chief economist Shane Oliver.
There’s also a couple of historical factors behind it.
“US funds have a tax year that ends around September so they sell losing stocks to book capital losses against capital gains so as to reduce tax bills,” Oliver told Yahoo Finance.
“But they then have to buy back into the market later in the year. This – combined with the payment of bonuses at year-end which are then invested into shares – and optimism about prospects for the new year all push share markets up from around this time of year,” he said.
But some say this Christmas rally predates the history of America itself, and goes as far back as the Northern Hemisphere crop cycles, where merchants would sell grains purchased in late autumn and invest the money in the share market. “But that’s a bit too complicated,” Oliver said.
Australia and S&P 500 stocks are on track to end 2020 on a high note, the economist added.
“So far so good for this year!”
‘No one wants to be left behind’
There are a few other theories for why the stock market tends to push up over the new year, such as increased holiday shopping; improved investor sentiment thanks to the Christmas cheer; and institutional investors settling their books before they go on holiday, according to Investopedia.
A good deal of it likely comes down to investor ‘FOMO’, or fear of missing out.
“Sometimes, it's one of those things where the market moves just because everyone else expects it to – and no-one wants to be left behind,” Motley Fool chief investment officer Scott Phillips told Yahoo Finance.
“Some years ago, there was a thing called the January effect. The market tended to go up most Januarys. So, investors being investors, they decided to get in ahead of it... by buying in December. Hey presto, we have the Santa Claus rally.”
“You can guess what happens next, right: investors are already trying to get ahead of the Santa Claus rally... by buying in November.”
Are we heading towards a bubble?
Phillips doesn’t think so.
“We're still below our February highs. Yes, there are reasons for that, but I think that's the point – it's hard to make the case that we're in bubble territory,” he said.
“I don't think there's anything to fear – but any US volatility in the coming months is likely to hit us here in Australia, just as they ever have.”
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