The Santa Claus rally is used to describe the continuous increase in in the stock market. This phenomenon usually occurs in the week leading up to Christmas, 25th December – hence the naming convention. However, there have been other definitions regarding this rally, with some people using it to describe the tendency for the stock market to increase in the last five trading days of the current calendar year and the first two trading days of the new year.
With the market showing signs of an upward trend since 29th November 2022, many wonder whether the Santa Claus Rally came early this year. This article will explain some reasons for the ongoing market rally and whether the Santa Claus Rally might have come earlier this year.
Understanding the Santa Claus Rally
The Santa Claus rally was first documented by Yale Hirsch in “Stock Trader’s Almanac”. The Standard & Poor 500 Index pattern gained an average of 1.5% during the seven-day period from 1950 through 1971 in the five trading days of the year and the first two market days of the new year. To Hirsch, the rally serves as an indicator of the coming year for the stock market.
Some factors causing the Santa Claus Rally
Here are a few possible reasons to explain the stock market gains over the seven days trading period:
- Traders buy stocks in anticipation of a rally in January, known as the January effect.
- The period between Christmas and New Year can offer traders an optimistic sense about the coming year, thus causing them to buy more.
- End-of-year bonuses from work and gifts during the holiday season give traders more capital to invest in the stock market.
- As it’s the end of the year, institutional players might begin making year-end adjustments before Christmas and strategising for the following new year.
- More traders are aware of the phenomenon of the Santa Claus Rally and is buying into the markets in hope of the market rally in the weeks to come.
These reasons stated above are just potential factors, traders should always do their due diligence before proceeding to trade.
The Stock Market Rally in The Last Week of November 2022
In the last week of November, the S&P 500 Index saw an increment of 122.48 points or 3.09%, at 4080.11. The Dow Jones Industrial Average saw a considerable raise of 737.24 points or 2.18%, at 34,589.77. This saw the markets close in the green on the last day of November. Traders are beginning to associate this lift in markets to the Santa Claus Rally happening earlier than anticipated.
Reasons For The Stock Market Rally
Here are some reasons for the potential rally that occurred at the end of November.
- Jerome Powell Signalling the Federal Reserve Slowdown on Interest Rate Hike. In a speech by the Federal Reserve Chairman, Jerome Powell at the Brookings Institution hinted that the interest rate will be slowed down in December. His comment indicated that the Fed would likely raise interest rates by 50 basis points instead of 75 basis points in their next Federal Open Market Committee (FOMC) meeting. This was a slowdown in the pace of the Fed’s aggressive rate hikes throughout the year. For traders and investors, this was considered good news as higher interest rates are expected to slow down the economy growth and can hurt consumer spendings.
- Black Friday and Cyber Monday Sales. According to Adobe Analytics, consumers spent about $35.4 billion over the five days of holiday shopping during these two days. On Cyber Monday, the sales hit a record of $11.3 billion, a 5.3% jump compared to last year, while Black Friday sales were $9.12 billion, up 2.3% compared to previous years. The demand from consumers drove the increase in these sales records which helped retail stocks to bounce higher, potentially enabling the November rally.
The end of November stock market positive results might signal an early start to the Santa Claus Rally, and there is an opportunity for potential opportunities and vice versa. Investors and traders can take advantage of this market opportunity that may present during this Santa Claus Rally with Vantage.
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