The Santa Claus Rally: How Its Best Start in 20 Years Could Affect Your Stocks
On the first Monday after Christmas, which fell on a Saturday in 2021, the stock market closed on a high, with the S&P 500 hitting its 69th closing high of the year. Such a post-holiday investment spike is commonly referred to as the “Santa Claus Rally” and investors look forward to the market surge, often amidst the absence of any other exciting news during the week after Christmas and the first few days of January.
“There is virtually nothing on the calendar,” Michael Reinking, senior market strategist for the New York Stock Exchange, told Kiplinger.com.
What Is the Santa Claus Rally?
The Santa Claus rally describes a surge in stock prices beginning when the market opens after Christmas, and concerns a period spanning the week between Christmas and New Year’s, ending in the first few days of January. It is typically driven by holiday shopping, tax considerations, holiday bonuses, and the closing books of institutional investors. Some speculate that, with more fiscally conservative (and pessimistic) institutional investors taking a break for the holidays, the market is driven by optimistic retail investors during the final week of the year. Whatever the cause, a Santa Claus rally often leads into a bullish stock market.
However, the 2021 Santa Claus rally, which started strong on Dec. 27, began to fizzle by Dec. 29, with the S&P 500 ending 0.1% down, and Nasdaq dipping by 0.6%. Overall, however, the Dow Jones continued to climb, ActionForex.com reported. Concerns about the omicron variant of COVID-19 may have slowed the rally.
What Should You Do During a Santa Claus Rally?
Retail investors may get a thrill out of seeing their portfolio’s bottom line rise during a Santa Claus rally. If you’ve had an eye on selling for fast gains, it could be a good time. But remember to factor in the tax ramifications for 2021 if you realize capital gains this late in the year.
If you’re looking to reduce your tax bill with a donation to a 501(c) corporation recognized by the IRS, you may have time to donate stocks directly while they are at a solid sell point.
But your best bet is to hold tight, stay the course, and keep most of your portfolio in place as a long-term investment. As Warren Buffett says, “our favorite holding period is forever.”
While this advice shouldn’t be taken literally, he emphasizes focusing on the long-term and not taking risks on things like rallies — even if they are named after jolly old St. Nick.
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