The Santa Claus rally lacks a concrete definition, but the gist of the theory is that stocks perform well in December â€“ particularly in the period between Christmas and the first days of the New Year.
Indeed, December traditionally has been the best month for U.S. stocks. The Standard & Poor's 500 Index has posted positive returns in December 77% of the time since World War II, compared to 59% for all 12 months.
If you follow the data back to 1896, you'll find that the average December return for the Dow Jones Industrial Average is 1.2%, compared to 0.5% for all other months.
"The market's performance in December has traditionally been quite favorable, as it has risen the highest, and stumbled least frequently, of all months," Sam Stovall, S&P's chief market strategist, wrote in a research note. "What's more, market tops and bottoms have rarely occurred in this month. So even though history offers no guarantees, it delivers reassurances."
Historical records offer no guarantees, but they're not without merit. In fact, analysts believe there are tangible reasons for stocks to rise in December: Holiday sales figures tend to make for positive headlines. Year-end investment reports typically offer upbeat outlooks for the coming year. Many investors rebalance their portfolios around this time. And the holiday season itself can often translate into optimism.
These factors and more make the Santa Claus rally one of the more consistent, albeit folksy, investment indicators.
"It's pretty much like clockwork," Jeff Hirsch, editor of the Stock Trader's Almanac, told The Associated Press. "And when it doesn't happen, it can be a very helpful warning of impending trouble."
For example, the market tanked in 2000 when there was no Santa Claus rally in 1999. More recently, a late-year drop in 2007 foreshadowed a disastrous 2008.
This year, December has already gotten off to a strong start.
The Dow is up 3.31% since Dec. 1 and the S&P 500 is up 4.44%.Â
However, U.S. stocks will have to overcome a lengthy list of potential setbacks. The European debt crisis has rattled overseas markets and political gridlock and high unemployment has sapped investor confidence in the United States.
Still, the U.S. stock market has yet to be torpedoed by such troubles and analysts remain optimistic that 2011 will get off to a strong start. If not, then the absence of a Santa Claus rally could be a foreboding message.Â
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