For those thinking about adding to your stock portfolio, we’re approaching one of the seasonally strongest investing weeks of the year – as if the holidays weren’t festive enough!
Seasonal investment trends should never trump fundamental analysis for the long-term investor. However, it doesn’t hurt to at least know which parts of the year are typically weak or strong for the stock market, especially if you’re considering buying or selling stocks in the short term.
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Here’s how often this aptly named year-end investing trend manifests itself and how much investors can expect to benefit from it.
Historically, stocks rise more often during the last trading week of the year and the first two days of January than at any other time of year. This curious phenomenon is often called the Santa Claus Rally. Yale Hirsch first coined the term in the Stock Trader’s Almanac in 1972, so this phenomenon has been around for a long time – probably for most of the modern American stock market era.
According to Carson Investment Research, the period of Sinterklaas between 1950 and 2022 will see an increase in S&P500(SNPINDEX: ^GSPC) about 80% of the time, with an average gain of 1.32%. That may not sound like much, but it’s actually a big gain for just one week. In fact, Santa Claus Week has the third highest historical return of all seven-day periods, and it is the week with the highest frequency of gains.
The causes of seasonal patterns in the stock market, including the Sinterklaas rally, are not precisely known. Once trends are established, they can be somewhat self-fulfilling as investors buy during known strong periods and sell during weaker periods.
However, there are several possible causes of the Santa Claus rally phenomenon:
Investors generally become optimistic for a new year.
Investors can try to get ahead of the January effect, when many investors put new money to work as part of their investment plan, as January is also known as a historically good month.
Employees can put their end-of-year bonuses to work.
Investors have completed harvesting the year’s tax losses, with a cut-off date of December 31.
Professional investors are going on vacation, forcing more retail investors – who are generally bullish – to trade.
Investors may also rush to contribute to traditional individual retirement accounts (IRAs), which allow tax-deductible contributions up to an annual limit, to reduce taxes owed in the new year.
How often does a Sinterklaas gathering take place? Image source: Getty Images.
Meanwhile, if Santa Claus doesn’t come, it could be a sign that next year will be a big lump of coal. According to Carson Research, of the only six times in the past thirty years when there was no Santa Claus gathering and the last week of the year had a negative return, January was subsequently down five times. Furthermore, the following full year had a negative return four out of six times.
That said, a Sinterklaas rally is no guarantee of a good year either. While most years following a Santa Claus rally are positive, it is also true that the stock market sees positive returns about 70% to 75% of the time. But there are exceptions. For example, there was a Santa Claus rally at the end of 2021, but the market suffered a brutal market decline of 19.4% in 2022.
While this knowledge can be useful, seasonal trends don’t necessarily affect your long-term investment plan. The stock market is inherently unpredictable, and as indicated in the example above, there are always exceptions – potentially big ones. When trying to time the market, investors must also consider whether stocks are expensive or cheap, the state of the economy, and many other fundamental factors.
Furthermore, stock investors tend to perform well in the long term when they stick to a set strategy. Although the S&P 500 has risen 75% in all years since 1928, there can also be long periods, such as the 1930s, 1970s or 2000s, of negative or flat returns.
That said, the longer you stay in the market, the greater the chance of positive returns. If you invest in the S&P 500 and hold it for 10 years, the chance of a positive return increases to as much as 94%. And if you stick with the S&P 500 for 20 years, those odds increase to 100%.
That’s right. History shows that S&P 500 investors earned positive returns every time they held the index for 20 years or more, even when they entered the market at the worst possible time. All the more reason to develop a process-driven, emotionless way of investing for the long term.
That said, if your process dictates a contribution to your portfolio in the near future, you may want to do this before Christmas.
Consider the following before purchasing shares in the S&P 500 Index:
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Billy Duberstein and/or his clients have no positions in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
History says the market is about to enter the most bullish week of the year. Here’s how much investors can expect to win by 2025. was originally published by The Motley Fool
