A consensus carried out from 1950 to 2013 has revealed that December has ended up offering positive returns in 49 years and negative returns in 16 years, with an average return of 1.59%, as per moneychimp.com, the best in a year.
But U.S. stocks have defied the seasonal trend this time around. The first Fed rate hike in almost a decade and possibilities of four more hikes next year along with horribly low oil prices might make Christmas a little dull this year, curbing the natural progression of the end-of-season ascent, commonly known as the Santa Clause rally.
What is Santa Rally?
Santa Claus rally refers to the jump in stock prices in the week between Christmas and New Year’s Day. There are several reasons behind this surge including ‘tax considerations, happiness around Wall Street, people investing their Christmas bonuses and the fact that the pessimists are usually on vacation this week’ as per investopedia.
In fact, some even believe that investors buy stocks during this period to cash in on another strong equity event, known as the January Effect, which takes place soon after. As per the 2016 Stock Trader’s Almanac, in the last 45 holiday seasons, the Santa Claus rally has delivered positive returns 34 times with the average cumulative return being 1.4%.
If we go a little deeper, the consistency of this rally would be more visible. The Dow Jones Industrial Average has returned about 1.7% (on an average) since 1896. However, the Santa Claus rally failed to live up to investors’ expectation several times including in 1990, 1999, 2004, 2007, and 2014, per returns 34 times.
Will 2015 See a Santa Rally?
With just three days to go for Christmas, there are hardly any indications of such a surge. Global stocks were at great health last week with the S&P 500 recording its ‘best week since October 24, 2014’. But stocks lost their steam at the start of this week. All in all, the situation is shaky but thanks to compelling valuation (after the latest sell-off), one can’t ignore the prospect of a Santa rally this year as well (read: Winning ETF Strategies for Q4).
Currently, the U.S. economy appears to be the lone star in a tottering global backdrop. This fact, along with compelling valuation brings about bright opportunities for some U.S.-based momentum stocks and ETFs in the coming days, especially in a market rebound.
After all, no storm lasts forever. Thus, momentum investing might be an intriguing idea for those seeking higher returns in a short spell. Momentum investing looks to reflect profits from buying stocks which are sizzling on the market (read: Beat the Market with Momentum ETFs).
