By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) — Finally, a Santa Claus Rally that actually deserves the name.
I’m referring to the seasonally-favorable period that begins at the close this coming Monday, the last trading day before Christmas, and lasts until the end of the year. Though it’s not a very long period of favorable seasonality, the historical odds are quite impressive.
Since 1896, when the Dow Jones Industrial Average (DJI:DJIA) was created, it has produced an average gain of 1.06% during the week between Christmas and New Years. That is far higher than the average that prevails in all other weeks of the year — equivalent, in fact, to an annualized rate of more than 80%.
Furthermore, the market’s performance during the Santa Claus Rally period has been relatively consistent, turning in a gain 78% of the time. That compares to a gain rate of 54% for all other weeks of the year.
Notice carefully, however, that even though this upcoming period of favorable seasonality has strong odds, it is by no means guaranteed. It doesn’t work about 1 out of every 5 years, on average.
Last year was one such year, in fact: The Dow in last year’s Santa Claus Rally period lost 0.62%.
By the way, if the market doesn’t end up rallying between Christmas and New Years, you don’t need to worry that it somehow dooms the stock market for the coming year.
I go out of my way to point this out because of a saying that often gets bandied about this time of year that says “if Santa Claus should fail to call, the bear will come to Broad and Wall.”
I’ve been unable to find any historical support for this saying. Last year was a good case in point: Even though Santa Claus last year “failed to call,” the Dow today is more than 9% higher than where it stood at the end of last year’s Santa Claus Rally period.
Nor is this last year’s experience a fluke. Since the Dow was created in 1896, believe it or not, the stock market has actually performed slightly better whenever Santa has failed to call.
| Dow during Santa Claus Rally period | Dow’s average performance over subsequent 12 months |
| Gained | 7.1% |
| Lost | 8.3% |
To be sure, the difference between these two average returns is not significant at the 95% confidence level that statisticians often use to determine if a pattern is genuine. So it’s going too far to say that we should actually hope that Santa Claus will fail to call this coming week.
But these results do suggest that we can look forward to a likely rally this coming week without fretting too much about what it means if the market does not.
