Here Comes Santa Claus?

As we enter the week of Christmas, many investors are hoping to see a Santa Claus Rally in the next couple of weeks. A Santa Claus rally describes sustained increases in the stock market that occur in the last week of December through the first two trading days in January.

Since 1969, the Santa Claus rally has yielded positive returns in 34 of the past 45 holiday seasons. The average cumulative return over these days is 1.4 percent, and returns are positive in each of the seven days of the rally, on average.

There isn't a solid theory to explain the Santa Claus rally. Maybe the most plausible attributes it to investors buying before January to take advantage of price increases due to the January effect. This refers to increases in stock prices after a drop in prices in December, triggered by fund managers selling for tax loss harvesting purposes.