What Is A Santa Claus Rally?

Hello everyone and welcome back to Breaking the Dollar. I'm your host, Everett Millman. This week we're going to be discussing: what is a Santa Claus rally? This is something that you might have heard on the news. You might have read about in one of the financial news magazines. It does tend to come up every single year towards the end of the year. We start hearing about how there could be a Santa Claus rally. As the name implies, it generally occurs late in December as we get close to the Christmas holidays and even the New Year's holiday. And really the phrase Santa Claus rally is just a catchy term that tries to capture this seasonal trend wherein the stock markets usually do rally as we head toward the end of the year. When you look historically since 1950, the S&P 500 has its best average return in November and December and it's by quite a long shot. And for most people, the S&P 500 is generally understood as the broadest measure of the US stock markets.

So this begs the question, why does this happen? Why is there a Santa Claus rally? One of it is a little bit self-evident that along with the holiday season comes higher retail sales. So department stores and other vendors are selling more products because it is gift giving time. It is the holiday season. And then going hand in hand with that, there is also generally higher employment during the holidays. You have a lot of seasonal workers who it might be a part-time or a temporary position, but it does temporarily boost the employment situation. Overall, the holiday season is associated with a general uptick in economic activity overall. Another factor is that people generally will have more money in their pockets to spend at this time of year. A lot of people get year-end bonuses or Christmas bonuses, so that money does tend to cycle back into the economy.

But I think there is also something else at play here. And it is a theme that I have brought up before on the show when it comes up every so often. And that is confidence and sentiment. What people believe and feel about the economy and about their own employment situation goes a long way toward determining how the markets perform. In some sense, perception really is reality. And so it logically follows that if this is the most wonderful time of the year, if there is a lot of holiday cheer going around and people are feeling good and happy, that will, to some extent, boost the amount of optimism and confidence in the broader economy. I think it is really important that we don't discount that as a contributing factor. Because like anything else, confidence and trust really are the bedrock of the broader markets.

Something else that I think plays at least a small role in this trend is the fact that during the Christmas holidays, a lot of traders at banks and financial institutions, like all of us, they go on vacation. So what you tend to see is that trading volumes are much lower during the week of Christmas and even into the New Year. Now the reason that's important, what that means is when volumes are rather low, it doesn't take as much to have an impact on the prices of stocks and other markets. So with low trading volumes means that it is kind of easy to influence the averages higher. And more so than any other time of year, that seems to take place during the winter holidays. Now, when we look at the Santa Claus rally trend critically though, Santa Claus doesn't seem to come every single year or rather some years he brings with him a sack of coal. Even though all of these patterns that I described tend to take place, they're not written in stone.

So if you look at recent history in at least two of the last four years, we really haven't gotten a pronounced Santa Claus rally. There were other mitigating factors that kind of got in the way of the normal seasonal rally. Perhaps the most dramatic case of this was last year in 2018, the stock markets saw a major downward correction during December. And that was based on the fact that the Federal Reserve had hiked interest rates throughout the year. If you go a little further back to 2015, there was a contentious government shutdown toward the end of the year. And so we also saw markets go down in 2015. So the main point there being that this isn't entirely a foregone conclusion. Yes, it does usually happen. But as with all things in investing and markets and the economy, nothing is guaranteed. So thus far in 2019, we have seen a pretty nice uptick, a pretty nice boost in the stock market. But the question of whether or not we will see a truly sustained Santa Claus rally is a bit in question.

My main reasoning for that is the US equity markets are already trading at or near their all-time highs. That would seem to make it less likely that we move another leg up because we are already at rather high valuations. But on the other hand, as I said, we all know that Christmas is a rather consumer driven holiday. And as long as consumers are confident, that could be the fuel that gives us another Santa Claus rally this year. Most of the measures that you look at of consumer sentiment or consumer confidence are still pretty robust. So sort of irrespective of what else is going on in the underlying economy or what else is going on globally that can impact markets, it'll be important for us to watch and see how consumers are feeling to judge whether or not we do get another rally this Christmas season. So that wraps up our brief discussion of what a Santa Claus rally is and whether or not we're going to get one.

I'll turn to our mailbag and take a question from the listeners. This one comes to us from Liam in Glasgow. And Liam asks, what about Bitcoin with respect to de-dollarization? That's a great question. We did a recent episode on the trend of de-dollarization. And I sort of threw cold water on the idea that this was going to be something we see ramp up in the next few years. It's probably going to take at least a generation if not more. But that is a great question because I did neglect to focus on Bitcoin, but that is another one of those contributing factors that is lurking out there that could possibly lead to an acceleration of the trend of de-dollarization.

If more people begin to adopt Bitcoin and not only hold Bitcoin, but to actually use it as currency. That's something that we have not seen a whole lot of. People, especially millennials, are holding Bitcoin. They are following it and tracking it, but it's really not changing hands. It is not a medium of exchange yet. And that's what we would really have to see with cryptocurrencies in order for them to challenge the dollar. That does it for this week's episode. I want to thank everybody for tuning in. We appreciate everyone listening. Be sure to check out the next episode where -- we've discussed the gold standard a bit before, but I would like to give some reasons about why the gold standard may not be gone forever. So be sure to check that one out.