This is the first in a short series of blogs in which we will look at the so-called Santa Claus rally in stocks and find some answers to the question “is there a tendency for stocks to rally into the end of the year?”
This is not a simple question to answer, but a good place to start is with a data visualization. The chart on this page shows each month (vertical columns) of each year of the DJIA back to 1929 (rows). If the month was positive, the box is colored green. If the month closed down, the box is red. (There were no months that were unchanged.)
Spend some time looking at that chart. You can click on it to see it full size and zoom into specific years, or you can also zoom out so you see more (or all) of the data.
Tomorrow, we’ll look at this in a slightly different way, but here are a few numbers to consider:
- In this dataset, 58.8% of months are positive. (Any randomly selected month should be green about 58.8% of the time.)
- All Decembers are green 72% of the time. This is the largest percent green of any month.
- January, April, July, and November are close behind. Each of these has about a 62%-63% chance of being green.
- Red months are September (40% green), June (52%), and May (55%).
So, it appears that December has been green more than any other month in the dataset, but a look at the “Christmas Tree” (red and green) chart shows us that it’s far from a certain thing that December will be up. In addition, it looks like only two Decembers between 1942 – 1963 were red, so we have to wonder if that might be skewing the data.
Spend some time looking at this chart and thinking about questions to ask. We will look at this across different time slices, bull and bear market conditions, and then dig into daily returns instead of monthly.
Oh, final thought: most people call the December rally the “Santa Claus Rally” or “Santa Effect”, but that’s a mistake. That’s not the real Santa, and we’ll get to that too!