The Santa Claus Rally: Are Gains Coming to Town This Year?

Why are markets typically buzzing about a so-called Santa Claus rally during this time of the year, and  how often does it happen?

Let’s break down one of Wall Street’s favorite holiday traditions and what beginner traders should know about this seasonal market pattern, and why it matters.

The Basics: What Is the Santa Claus Rally?

The Santa Claus rally is a seasonal behavior where stocks tend to rise during the last five trading days of December and the first two trading days of January. That’s seven trading days total where markets have historically climbed more often than not.

Here’s the impressive track record: Since 1950, the S&P 500 has gained an average of 1.3% during this period, posting positive returns about 79% of the time. That’s way better than a random seven-day period, which only rises about 58% of the time.

The term was coined in 1972 by Yale Hirsch, creator of The Stock Trader’s Almanac, who noticed this recurring pattern.

Why It Matters: What Drives (or Kills) the Rally

When the Santa rally works, several forces typically come together:

• Holiday optimism: General festive cheer among investors translates into buying activity. People feel good, markets often follow.
• Lighter trading volume: Many institutional investors (think big hedge funds and pension managers) are on vacation. This leaves more room for bullish retail investors to move prices.
• Year-end portfolio adjustments: Fund managers make final tweaks to lock in performance numbers they’ll report to clients.
• Tax-loss harvesting reversal: Investors who sold losing positions in December for tax purposes often jump back into the market in January.
• Bonus season: Some folks invest their year-end bonuses, adding fresh capital to markets.

History Lesson: What Happened Last Year?

Let’s take a walk down memory lane to see whether the markets were naughty or nice during the 2024 holiday season.

Spoiler alert: Santa did not show up at all. 

Despite the S&P 500 posting an impressive 23.3% gain for the full year, December last year was a disaster. The index declined 2.4% during the month, marking only the third monthly decline all year.

Even worse, the S&P 500 fell during every single business day between Christmas and New Year, something that had never happened before in the index’s history.

What went wrong? Here are a few culprits:

• Fed hawkishness: The Federal Reserve signaled fewer rate cuts for 2025 than markets expected, causing the S&P 500 to drop 2.9% in one day
• Rising bond yields: Higher yields made bonds more attractive compared to stocks
• Elevated valuations: Stocks were already trading at high multiples, making them vulnerable to profit-taking
• Broad weakness: Eight of the 11 S&P 500 sectors ended December in negative territory

The 2025 Outlook: Will Santa Show Up This Year?

Wall Street is divided. Let’s look at both sides.

Arguments FOR a Rally:

• Early holiday cheer: Markets already showed strength during Thanksgiving week, with the S&P 500 surging nearly 4%.
• Potential Fed rate cut: Markets are now pricing in an 83% chance the Federal Reserve will cut interest rates at its December meeting, up from just 30% a week earlier. Rate cuts typically boost stocks.
• Strong corporate earnings: Majority of S&P 500 companies beat earnings estimates this quarter, although gains were concentrated in certain sectors like tech.
• Historical rebound pattern: Back-to-back failed Santa rallies are rare, happening only twice since 1950 (1993-1994 and 2015-2016). After most failed rallies, markets bounce back.
• Bullish 2026 forecasts: Major banks like Deutsche Bank project the S&P 500 could hit 8,000 by end of 2026, signaling confidence in continued gains.

Arguments AGAINST a Rally

• Unpredictable 2025: “None of the months this year have behaved the way they have seasonally,” notes Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets.
• Options market pessimism: More investors are buying downside protection instead of betting on seasonal strength, suggesting caution.
• AI valuation concerns: After massive AI-driven gains, some worry about stretched valuations. Even the European Central Bank warned of “sharp correlated price adjustments” as a risk.
• Bitcoin pressure: Crypto weakness could continue as newer investors sell and long-term holders take profits after the recent “halving” event.
• Fed uncertainty remains: Despite potential rate cuts, the overall path for monetary policy in 2025 is still murky.

The Bottom Line

The Santa Claus rally is “real” in the sense that stocks have historically risen during this period more often than not. But it’s not a law of nature, it’s just a tendency… and tendencies can break. The 79% success rate means the Santa Claus rally still fails about one in five years.

What to watch going forward:

If you’re a long-term investor, don’t restructure your portfolio based on a seven-day seasonal pattern. But if you’re actively trading, here’s what to watch:

• The December Fed meeting: Rate cut decisions could swing sentiment, and the Fed’s outlook for 2026 could strongly influence positioning.
• Holiday spending data: Consumer strength signals economic health
• Market breadth: Are gains broad-based or concentrated in just a few stocks?
• Bond yields: Rising yields compete with stocks for investor dollars
• The January Effect: Another seasonal pattern that suggests stocks (especially small caps) tend to rally in January. But like the Santa rally, it’s not guaranteed.

Also keep in mind the old Wall Street saying from Yale Hirsch: “If Santa Claus should fail to call, bears may come to Broad and Wall.”

In other words, when the rally doesn’t show up, the following January and year tend to be weaker. But even that’s not guaranteed, as stocks surged in 2024 despite no Santa rally in 2023.

The takeaway? Stay informed, but don’t bet the farm on Santa showing up. Markets have a way of surprising everyone, regardless of what the calendar says.

Whether you’re trading currencies, stocks, or any other market, remember that no pattern is foolproof. The best gift you can give yourself as a trader isn’t predicting when Santa will show up; it’s managing your risk so you can survive even when he doesn’t.

Disclaimer: Trading and investing carry risk, and past performance does not guarantee future results. This article is for educational purposes only and should not be considered investment advice. Always do your own research and consider consulting with a financial advisor before making investment decisions. Seasonal patterns are observations, not predictions, and should never be the sole basis for trading decisions.