by Mark Hulbert, Yahoo Finance,
Commentary: What does the ‘Santa Claus Rally’ mean, really?
Will the real Santa Claus Rally please stand up?
I ask because, even though lots of advisers refer to something called a Santa Claus Rally, there is little agreement on what, exactly, it involves.
A cynic might suspect that these advisers are simply exploiting Santa’s good name to justify whatever positive forecast they might otherwise have during the holiday season.
But, surely, advisers wouldn’t be so shameless to do that, would they?
Consider the range of meanings that I have found advisers to give to the “Santa Claus Rally”:
At some point during the month of December, the stock market will rally
The entire month of December tends to be a good one for the stock market
The stock market performs particularly well starting around Christmas and lasting until the first days of the New Year
Do any of these definitions have strong support in the historical record? To find out, I examined the Dow Jones Industrials Average (^DJI – News) back to 1896, when it was created.
It turns out that the first definition — that the stock market will rally at some point during December — is true but pointless, since the stock market rallies during every period of the year. There has never been any month of the calendar in which the stock market didn’t at some point stage a rally.
Consider next the second definition that some give to a so-called Santa Claus Rally — the notion that December as a whole is a particularly strong month for the stock market. At first blush the evidence for this proposition would appear to be strong. The average return for all non-December months since 1896, for example, is 0.5%. For Decembers, in contrast, the average return is 1.2%.
But there is less here than meets the eye. Given the variability in the monthly results over the last 114 years, it turns out that the difference between December and the other months is not significant at the 95% confidence level that statisticians often use to determine if a pattern is genuine.
What about the third definition of the Santa Claus Rally, the one that refers to strength between Christmas and early January? It turns out that this one does have strong historical support. In fact, it corresponds to two seasonal patterns that have been well-documented in other contexts: The so-called “turn of the month” and “turn of the year” effects.
But notice carefully what this means: The Santa Claus Rally that really exists does not arrive until Christmas is upon us.
Just like the man himself.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Tags: Great Minds, investing strategies, mark hulbert, patterns, santa claus rally, stock market, trends