Any experienced trader or investor will be aware of the phenomenon known as the ‘holiday effect’ when the days leading up to and following holidays have been shown to impact stock markets.
Many traders will look forward to these holiday opportunities, hoping to capitalise on them.
In the period between US Thanksgiving and Christmas Eve, major stock exchanges have seen their indexes climb on average since 1990, based on historical data from Kensho.
The Dow Jones Industrial Average has seen an average gain of 1.93% between the two holidays, while the Nasdaq 100 averages a gain of 1.66% and the S&P 500 averages a gain of 1.77%. The Russell 2000 beats all these indices with an average gain of 2.46% since 1990.
Of course, there will be some years where this positive trend does not occur in the way it has over the last three decades. For example, during this period in 2015, the Dow fell 1.47% instead of rising its average of 1.93%.
Why does the market perform this way in December?
There are a handful of reasons for why the end of December tends to experience greater than average increases in stock value. Some of these include:
- People are investing in anticipation of the January effect, a time when stocks rise more than normal
- The sheer optimism of the holiday spirit
- Mutual fund managers purchase more in order to drive up prices and show better returns on the year
- Investors avoid selling before the end of the year in order to push earnings into the next tax year
- Holiday bonuses are given out and invested quickly into the stock market, pushing up prices
Looking to spot a Santa rally? Using historical trends and indicator tools can be a good place to start.
You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.