December 19, 2016
MARKET UPDATE
Santa Claus Rally
Will It Be a Happy Holiday or a Feliz Navi-Dud
“If Santa Claus should fail to call, bears may come to Broad and Wall”
—2017 Stock Trader’s Almanac
The Stock Trader's Almanac is published annually and provides historical price information on the stock
market.
portfolio adjustments for maximizing tax
benefits before year end;
 investor optimism associated with the holiday
season; or
 the possibility that a large number of short
sellers are on vacation until the new year.
No matter what the reason for these returns, there
is no changing the fact that returns are generally
positive over this period.

According to the 2017 Stock Trader’s Almanac, since
1969 the Santa Claus rally has yielded positive
returns in 34 of the past 46 holiday seasons—the
last five trading days of the year and the first two
trading days after the New Year's. The average
cumulative return over these days is 1.4%, and
returns are positive in each of the seven days of the
rally, on average. Nevertheless, each year there is
at least one day of declines.
Alternative research over a longer period confirm
the persistence of these trends: According to
historical data going back to 1896, the Dow Jones
Industrial Average has gained an average of 1.7%
during this seven-day trading period, rising 77% of
the time.
There have been some years that the bears have
stolen the rally like the Grinch stole Christmas and
Chart 1
Average Santa Claus Rally Returns on S&P 500
1969-2012
102
Returns Indexed:
100=6-days before New Year's
In the trading days between Christmas and New
Year’s, the S&P 500® generally sees a rally, netting
abnormally high returns. This phenomenon has
become known as the “Santa Claus rally” by many
investors and the mainstream media. These
abnormal returns seem to persist despite the fact
that markets are generally efficient. Possible
reasons for these outsized returns include:
S&P 500 Returns
101
100
99
98
97
96
Average 1969-2014
Average 1990, 2007
95
t+0
t+1
t+2
t+3
t+4
t+5
t+6
t+7
t+8
t+9
Source: Standard & Poor’s PNC, S. Claus
the Santa Claus rally failed to deliver presents. In
1990, concerns surrounding Operation Desert
Storm were more than enough to overpower the
cheer usually seen between Christmas and New
Year’s. The S&P 500® sold off 4% in 1999 in a very
disappointing nine days. In 2004, another conflict in
Iraq and the tsunami in the Indian Ocean were
enough to keep the Santa rally at bay. Also
noteworthy was the 2.5% decline between
Christmas and New Year’s in 2007 when the
financial crisis was beginning to rear its ugly head.
When the rally is not realized, the New Year is
dominated by the bears. For example, the January
following the 4% decline in 1999 began a 33-month
decline in the S&P 500. Also, the decline in the
S&P 500 at the end of 2007 kicked off the
second-worst bear market in modern history.
Santa Claus Rally
More recently, the markets experienced a year
without Santa. In 2015, after a strong rally in
autumn, the market lost steam, and the S&P 500
steadily slipped through the rest of the year. It
seems falling oil prices and growing uncertainty
about the then-forthcoming U.S. elections may have
soured investor’s egg nog. The S&P 500 ended up
losing almost 1% over the seven-day interval. This
was the third consecutive year of such Santa
declines. Nevertheless, the markets appear to have
broken the Krampus curse, and the S&P 500 was
up 9.8% for the year 2016 through November 30
The Big Questions for This Year’s
Holiday Season
Markets have been very nice so far this year, with
the S&P 500 is up about 10% through the end of
November. Can the S&P 500 continue such robust
growth? There are headwinds that could ruin the
holiday: rising interest rates could hurt the overall
market, policy uncertainty both domestic and
international could unsettle investors, or rough
Bill Stone, CFA, CMT
Chief Investment Strategist
weather (courtesy of Snow Miser) could dampen
domestic retail sales. These worries might be
enough to turn holiday cheers into bah humbugs
and the Santa Claus rally could skip equities
altogether and instead be found in the high-quality
fixed-income market, though this is far from
certain.
Or will the Santa Claus rally live on another year?
The U.S. economy seems to be on a steady path
upward amid consistent job reports and steady
industrial production gains. The unemployment rate
has fallen to about 5%, its lowest level in more than
almost eight years. And, though oil prices are
rising, they remain low relative to the highs seen
just a few years ago, leaving more money in
consumers’ wallets. Generally, these positive
economic trends could be enough to garner a visit
from Old St. Nick.
As the New Year approaches, we will be anxiously
awaiting the results of the Santa Claus rally. The
PNC Investment Strategy team wishes you and your
families a very happy and prosperous new year.
Michael Zoller
Investment Strategist
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