The Santa Claus Rally and January Effect

The Santa Claus Rally and January Effect

Given the time of year and thinking about the holidays, I thought it would be fun to do a little data analysis on the so-called “Santa Claus Rally” and “January Effect” in the equity markets.

The Santa Claus Rally period is typically defined as the last five trading days of December and first two trading days of January. The January effect essentially sees equity prices increase during this month. There are some hypotheses or possible “explanations” for these. We will get to that in a moment, but first, the numbers.

I wanted to look at this a little differently and consider the entire month of December. Since all the data/research during the typical period indicates that a majority of the time this holds true (meaning positive returns during that 7-day stretch) led me to consider if the same exists over the entire month.

Using the S&P 500, I gathered the monthly return for each December dating back to 1971. Simply counting positive returns, this occurred 75% of the time with the average return of 1.57%. For comparison, I was curious how that stacked up against the annual calendar year return. The results here showed that 79% of the annual returns were positive and the average return was 11.78%. Finally, to consider the January effect, the result was still in line, but lower, with 60% of January monthly returns being positive and an average return of 1.31%.

Now for some possible reasons or explanations out there as to why this is.

• Buyers coming in to purchase beaten-down companies at a bargain
• Window dressing by managers to invest cash before year-end
• January effect due to unwinding of tax-loss harvesting
• New year, new resolution to invest

So what does this really tell us? Not much. As investors (and by instinct as humans) we try to make sense of chaos, identify trends for decision-making or simply rationalize the irrational. This could very well be the case here. Even if history suggests this phenomenon exists, there is no guarantee it will hold year-in and year-out, or that you should attempt to use it to your advantage.


Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.

About The Author

Derrick is an Assistant Vice President and Portfolio Manager of Manager Selection and Due Diligence for Washington Trust Bank’s Wealth Management & Advisory Services and a Certified Investment Management Analyst® professional. He is responsible for all external investment manager analysis, selection, monitoring and retention. He holds a BA from Eastern Washington University and MBA from Gonzaga University.