"The facts suggest that successful market timing is extraordinarily difficult to achieve."
- Burton Malkiel, economist and author of A Random Walk Down Wall Street
Beneath their dark-suited number-crunching demeanour, the Wall Street honchos secretly believe in Santa Claus. They believe stocks rally in the trading days between Christmas and New Years, and the first two trading days after New Years. But then again, "the Santa Claus rally" is just one of the many silly rhymes Wall Street has coined - my favourites include "Sell in May and go away" and "The trend is your friend".
Here are some facts:
- According to the 2022 Stock Trader's Almanac, from 1969 to 2020, the "Santa Claus Rally" yielded positive returns in the stock market in 40 of the past 52 holiday seasons, with an average return of 1.3%.
- Since 1896, the Dow Jones Industrial Average has risen 77% of the time during that period.
- From 1952 to 2020, the S&P 500 saw 51 December advances and 18 declines, with an average return of 1.43%.
Wall Street has come up with all sorts of reasons for this, such as tax-loss selling (selling securities which have incurred losses during the year in order to reduce capital gains taxes) and window-dressing (buying best performing securities to pretend one has been holding winning stocks all along). Other theories are more of a stretch - some like to believe the bears are on vacation and that it's holiday season induced optimism.
We would love for market anomalies to be so obvious, but the fact of the matter is, when datasets are expanded, these 'anomalies' fade into normalcies with no statistical significance. In a recent statistical study on 30 years of market returns data, it was strongly concluded that December looks no different from any other month in the year. There is no evidence that any month is statistically better - or worse - than other months.
What does the Santa Claus rally mean for your portfolio? Nothing. Considering the number of random variables in the universe, some of these supposed market anomalies will exhibit a correlation with returns by chance alone. Instead of betting your fortune on Santa spreading his goodwill around the markets, stick to your investment plan, invest in proven strategies that have stood the test of time, and enjoy your eggnog.
Some proven strategies we have written on:
- Why passive investing beats trading (31 May 22) #passivevstrading
- Like Lego play, is your investment portfolio built to last? (7 Apr 22) #diversification
- Stay invested in a downturn — these charts show why (2 Aug 22) #stayinvested #timeinthemarket
With Endowus, you can effortlessly invest in these proven strategies of globally diversified, low-cost funds and portfolios seamlessly - instead of having to spend your holidays DIY and calculate the odds of a potential Santa Claus rally!
To get started with Endowus, click here.
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