Date: January 4, 2019

Santa Claus Came a Callin’

The media spent the period from just after Thanksgiving to mid-December parading out pundits to talk about the Santa Claus Rally (SCR). Most of those pundits said the SCR was failing and it meant trouble for the stock market in 2019. I wrote several times that the traditional SCR, pioneered by Yale Hirsch of the Stock trader’s Almanac, was simply the last five trading days of the year and the first two days of the new year. An up SCR meant good things to come for the New Year while a down one meant stock market downside. There’s nothing more to it. There’s no discretionary element or opinions needed.

Research showed that if the last five trading days of the year and first two trading days of the New Year (Santa Claus rally) did not show a positive return, a bear market or significant correction was likely during the coming year. While that was certainly the case years ago, recent history since 2001 shows a significantly muted trend and I wonder if this trend has been fully diluted because of computerized trading, the proliferation of ETFs or even decimalization.

Bears love to point out that Santa did not call in 1999 nor 2007 when two devastating bear markets were about to unfold. However, Santa also did not call in 1990, 1992, 1993 and 2004, yet no bear market or major correction ensued the following year. Santa also did not come in 2014, but I am sure proponents of this trend would point to the 15% summer decline as evidence that it “worked”. In 2015, Santa was a no show and stocks were in in the midst of a 15% correction which bottomed on January 20, 2016. How would they score that?

Conversely, Santa called in 2017 (+1.04%) but look what happened in 2018, a significant correction and down year! In 2010, Santa showed up but stocks saw a 20% decline in 2011. Santa came in 2000 and 2001, however 2001 and 2002 were awful bear market years. 1997 saw a big Santa Claus rally, yet 1998 had a 20% correction. The same can be said about 1989 and 1986.

I bring this topic up each and every year, not because I am a huge supporter or believer in the SCR, but because the masses are mostly wrong about it. It’s not some nebulous, loose thing. And from my seat, depending on the year you start, there is roughly a 70%+ chance of an up year regardless. The SCR is a cute seasonal trend, but far from anything worthwhile in managing money.

For what it’s worth, the SCR just ended at Thursday’s close with the following results.

Dow Industrials +1.07%

S&P 500 +1.28%

S&P 400 +1.30%

Russell 2000 +3.02

NASDAQ 100 +1.65%



Paul Schatz, President, Heritage Capital