As December approaches, investors are turning their attention to whether the stock market will experience a “Santa Claus Rally.” This phenomenon refers to the tendency for stock prices to rise during the final trading days of December and the first few trading days of January. It is one of the most anticipated year-end events for investors. But what exactly is the Santa Claus Rally? Why does it occur, and how can investors seize this short-term market opportunity? This article will answer these questions.

What is the Santa Claus Rally?

The Santa Claus Rally describes the stock market’s tendency to post gains in the final week of December and the first two trading days of January. Historical data from the U.S. stock market indicates that the S&P 500 Index has often delivered positive returns during this period, making it a well-recognized seasonal phenomenon.

According to historical data compiled by Bank of America, December has been one of the best-performing months for the stock market. Since 1928, the probability of December gains has reached 74%, with an average return of 1.32%. In U.S. election years, this probability rises to 83%, with average returns increasing to 1.51%. Notably, the market tends to perform better in the latter half of December, as the average return for the final ten trading days stands at 1.17%, significantly higher than the 0.05% recorded in the first ten days.

Why Does the Santa Claus Rally Occur?

1、Holiday Spending and Investor Optimism

During the holiday season, consumer spending typically surges, driven by gift-giving, travel, and celebrations. This spending boost directly enhances the earnings expectations for retail and consumer goods companies, supporting stock prices in these sectors. In addition, the holiday cheer often translates into more optimistic investor sentiment, encouraging greater risk appetite.

2、Portfolio Adjustments by Fund Managers

As the year draws to a close, fund managers often rebalance their portfolios to optimize annual performance. This practice, known as “window dressing,” may involve buying high-performing stocks to improve portfolio returns on paper, thereby driving stock prices higher.

3、Tax Strategies and Market Rebalancing

Toward the end of the year, investors often engage in “tax-loss harvesting,” selling underperforming assets to offset capital gains taxes. This selling activity usually concludes early in December, and the reinvestment of funds afterward can help propel the market upward. Furthermore, institutional investors may rebalance their portfolios to meet year-end allocation targets, adding further momentum to the market.

4、Lower Trading Volume and Increased Volatility

During the holiday season, trading volume typically declines, which means stock prices can be more easily influenced by large trades. Combined with strategic positioning by some investors, this can amplify market volatility and price movements, contributing to the Santa Claus Rally.

How to Seize the Santa Claus Rally?

1、Focus on Consumer and Popular Sectors

During the holiday season, sectors such as retail, consumer goods, and travel tend to benefit from increased holiday spending. Investors can focus on quality stocks in these industries or consider related ETFs to capitalize on these trends.

2、Invest in Index Funds for Broader Gains

For investors who are less confident in picking individual stocks, index funds like S&P 500 ETFs provide an opportunity to gain exposure to the market’s overall upward momentum while reducing the risk of individual stock volatility.

3、Set Proper Entry Timing and Risk Controls

Since the Santa Claus Rally is a short-term phenomenon (spanning the last five trading days of December and the first two trading days of January), investors should use technical indicators to time their entries. At the same time, setting stop-loss points can help mitigate risks if the rally fails to materialize as expected.

Will the Santa Claus Rally Occur This December?

Analysts are optimistic about the prospects for this year’s Santa Claus Rally. Goldman Sachs predicts that the S&P 500 Index could rise by 4% by year-end, potentially reaching 6,200 points in early 2024. Similarly, JPMorgan believes that a favorable macroeconomic environment and accelerated corporate share buybacks will support further gains in the U.S. stock market.

However, investors should remain aware of potential risks. Elevated stock valuations, persistently high interest rates, and lingering global economic uncertainties could pose challenges to market performance. As such, investors are advised to stay vigilant and adjust their strategies in response to market developments.

How to Trade on uSMART

After logging into the uSMART HK APP, click on the search icon at the top right of the screen. Enter the stock code, such as "SPY.US" to access detailed information, trading history, and trends. Click the “Trade” button at the bottom right, select the “Buy/Sell” function, and submit your order after filling in the transaction conditions.

（Source: uSMART HK）