What is a Santa Rally and which stocks could enjoy a Christmas charge-up this year?

Is a Santa Rally a real phenomenon?

There are various calendar curiosities to consider when investing and trading — for example, ‘sell in May and go away’ — or in other words, selling out of the markets during the summer. Then there’s the ‘October effect,’ where traders think the markets tend to sell-off during the month. Or even the ‘January Barometer,’ a theory that returns in January sets the tone for the market for the next 11 months.

There is some evidence for these effects, but it’s perhaps key to recognise the psychology behind them. Arguably, a large part of the effect is the belief in the effect; investors believe a Santa Rally will happen, so invest more to benefit, thus creating the rally in a positive feedback loop that draws in more investors each year.

But whether this is the case or not, there is decent evidence that the effect is real — even though the performance of years past does not guarantee this year’s.

The term was first coined back in 1972 by Yale Hirsch, the founder of the Stock Trader’s Almanac, who defined the rally as being the final five days of the trading year and the first two days of the following year — though the timeframe is less defined nowadays.

These seven days have delivered a positive return on the S&P 500 around 80% of the time, since its inception through to 2022 — or 58 of those 73 years — with an average growth rate of 1.4%.

It’s worth noting that in the week leading up to Christmas Day, there appears to be no evidence for or against a positive effect, though some analysts think that value stocks outperform growth stocks in this week.

In the month of December as a whole though, the FTSE 100 has returned an average of circa 2.3% since its inception in 1984 — and enjoyed a Santa Rally 24 times between 1994 and 2023. Further, it has only had a negative month six times in this period. Interestingly, even in the 2008 Global Financial Crisis, the FTSE enjoyed a Santa Rally, and again during the pandemic in 2020 and 2021.

As you might expect, a Santa Rally tends to impact sectors subject to sentiment and consumer spending. Retail and consumer discretionary stocks with exposure to holiday shopping can outperform, especially in a strong economy.

Technology sector companies can also stand to benefit, as Christmas can be a time where digital payments and e-commerce records are broken. Specific financial sector companies also benefit, with brokers and investment banks enjoying increased retail investor fees.