During my futile attempt to get an early start on my holiday shopping, I thought about how important the holiday shopping season is for the economy, what it tells us about the consumer and the potential investment opportunities.
While the holiday season corresponds to shopping, parties and festivities, it can also be a good time for financial advisors to locate investment opportunities for their clients. That includes the famed Santa Claus Rally.
The Santa Claus Rally is a term used to describe the tendency of the stock market to produce 1% to 2% returns between the first trading session following the Christmas holiday and the first two trading sessions of the new year. The term was coined by Yale Hirsch in the 1972 version of The Stock Trader’s Almanac, which stated the S&P 500 index advanced 79.2% of the time between 1950 and 2022 and a Santa Claus Rally happened 58 times. The S&P 500 index also posted an average 1.3% return during these trading sessions. Table 1 shows the solid performance during these five trading days over the past 10 years.
While the calendar anomaly may be just that, the Santa Claus Rally unfolds as follows.
- Holiday Bonuses—We all remember Clark Griswold using his expected Christmas bonus to install a backyard pool. While most people aren’t receiving a pool-sized bonus, some will receive extra spending money or additional money to invest.
- Tax Management Strategies—One of the most popular tax management strategies is tax-loss harvesting, which involves investors realizing their investment losses by selling their losers and re-allocating the proceeds.
- Lower Trading Volume—Some traders and institutions take a break from their computers and sit in front of a warm fire sipping on holiday cheer, which reduces volume. This makes it easier for market bulls to spread their joyous sentiment.
- New Year’s Sentiment—Investing is behavioral, and many investors are cheerful and optimistic during the holidays, which tends to be good for equity prices.
Will We Experience a Santa Clause Rally This Year?
This year is not a typical year due to President Donald Trump’s re-election, and the Federal Reserve is in the early stages of its rate-cutting cycle. Equities tend to perform well during election years and during the initial stages of a rate-cutting cycle. Additionally, the consumer remains in a good spot and will continue to spend, which bodes well for retail stocks and a Santa Claus Rally.
The Importance of the Holiday Shopping Season
While the traditional Santa Claus Rally is a fun talking point, extending that period from the first trading session following Thanksgiving to the first two sessions after the new year is much more important for retailers and the economy. The holiday shopping season should be watched closely, as it’s a good barometer for the economy and stocks.
The holiday shopping season is a good indicator of consumers’ sentiment toward the economy and their willingness to spend, which is vital for the health of the U.S. economy. Consumer spending made up almost 68% of U.S. GDP during the second quarter of 2024, while the long-term average is 64%. Furthermore, according to the National Retail Federation, on average, sales during the November and December holiday shopping season account for 19% of total annual retail sales over the past five years.
Investment Opportunities During the Holiday Shopping Season
Tracking the performance of equity sectors is a key indicator of how the important holiday shopping season is fairing and whether consumer sentiment is cheerful or dreadful. Not only is the holiday shopping period a good time to find bargain prices for consumers, but it also provides some investment opportunities. While November tends to be the best month for equity performance, December and January also rank amongst the best. (Table 2).
In addition to sector performance being a good barometer for the holiday shopping season, one should consider specific industries that benefit from a busy and cheerful holiday season. Some industries include retail, transportation and food and beverage when trying to locate investment opportunities during the holidays (Table 3).