Opinion: Will Santa Claus save the stock market’s ‘Trump rally’?
CHAPEL HILL, N.C. — Do you believe in Santa Claus?
Many bulls on Wall Street evidently do.
These brokers and analysts are just like the retailers who shamelessly roll out their Christmas decorations as early as Halloween. That’s because there is no statistical basis for believing in a Santa Claus Rally in November or December.
In fact, the only seasonal year-end strength that does enjoy statistical support doesn’t kick in until after Christmas.
To be sure, brokers and analysts are rarely fazed by the absence of a strong statistical foundation, so it shouldn’t be a surprise that belief in the Santa Claus Rally persists. Last year, for example, as you can see from this chart, “Santa Claus Rally” started being a widely used search term the week before Thanksgiving—and reached a crescendo right before Christmas. According to the data collected by Google Trends, other years have followed the same script almost precisely.
So we can forecast with a high degree of confidence that coming days will see a big increase in references to a “Santa Claus Rally.”
Of course, not all analysts have the same thing in mind when they refer to a Santa Claus Rally. Some appear to be referring to nothing more precise than the market rising at some point between Thanksgiving and New Year’s. That’s meaningless, of course, since the market rises at some point during every season of the year—just as it also falls.
Others appear to have the month of December in mind, but that also isn’t very compelling. Even though December is one of the better months of the calendar for the stock market, on average, it isn’t the best (as judged by average returns of the Dow Jones Industrial Average DJIA, -0.19% since the late 1890s, when it was created). July has an even better record, for example. At the 95% confidence level often used when assessing if a pattern is genuine, statisticians are unable to conclude that December’s record is any different than those of other months.
The one definition of the Santa Claus Rally that does enjoy statistical support is based on seasonal strength between Christmas and early January. Over the last 120 years, the stock market between Christmas and New Years has risen 76% of the time, with the Dow producing an average gain of 1.01%. That compares to an average gain of just 0.10% across all other trading periods since 1896 of similar length, over which the stock market rose just 55% of the time.
In both respects, the Santa Claus Rally is statistically significant.
What all this means: The stock market cannot turn to Santa Claus to keep the Trump Rally going. The only real Santa Claus Rally doesn’t arrive until Christmas—just like the jolly old man himself.