Santa Rally? We prefer long-term analysis

Christmas is known for bringing good cheer, and historically it has been no different in the financial markets. Analysts have long identified their own festive phenomenon, the so-called ‘Santa Rally.’

First identified by Yale Hirsch in his 1972 book the Stock Trader’s Almanac, the trend behind it is that markets tend to rise before the December holiday period.

But our analysis shows that, while the rally is real (sometimes), it is not a reliable investment strategy. Tactical opportunities may arise in thin holiday markets, but disciplined asset allocation based on fundamentals, not folklore, should remain the key driver for investors.

The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.

Why might the ‘Santa Rally’ occur?

The phenomenon has been studied extensively by academics and financial media over the years, and a multitude of reasons have been put forward for its existence. Explanations include:

• Tax-loss selling and the subsequent rebound: Investors often choose to realise capital losses earlier in December to offset gains for the tax year. As the pressure that puts on underperforming stocks abates, those shares that were sold off could suddenly rebound in the final trading days of December.
• Window dressing by fund managers: Institutional investment managers may attempt to ‘clean up’ their share portfolios before the year-end reporting. This can involve trimming their holdings in underperforming shares and boosting their allocation to outperformers, boosting share prices in December. 

Other explanations include traders feeling buoyant and optimistic as the Christmas holiday season approaches. Stock market trading during the holiday period is also typically thin.

With fewer large sellers and money continuing to flow into index funds, share prices could drift higher. The holiday period also typically brings a lighter news calendar and fewer policy announcements, which may suppress volatility and risk temporarily.

Is the ‘Santa Rally’ a myth?

Like Santa himself, there are sections of the investment community that doubt if the Santa Rally really exists, claiming that it’s more fiction than fact.

To investigate we looked back over 50 years of data from US equity markets (specifically the S&P 500). Various academic papers propose a variety of time-windows for the Santa Rally in the days before (and sometimes after) Christmas. To keep things simple, we chose a two-week period before Christmas, a time when we would expect Christmas cheer to be at its uppermost.

The results make for fascinating reading. Over the 50-year assessment horizon we find that the S&P 500 rallied in 36 of the past 50 Santa Rally windows, delivering, on average, annualised returns of 14.4%. This is notably better than the annualised returns from the rest of year, which is 9.9%.

However, higher performance is not a reason to start pulling Christmas crackers. It is a statistical quirk that, through sheer probability alone, some periods of the year will exhibit stronger performance and others will be weaker.

To validate this, we ran a series of mathematical tests to consider whether the difference is down to luck or Christmas magic. The tests indicate the performance divergence could well be down to chance, like finding a silver coin in your slice of Christmas pudding.

Furthermore, in the last 10 years the hit rate of the Santa Rally has been, well, more miss than hit, with just five Santa Rally years beating average returns for the rest of the year.

Timing the market can be challenging

Discerning investors know better than to rely on folklore alone. Global macro conditions, liquidity constraints, and geopolitical surprises can easily overshadow seasonal trends.

For those managing significant wealth, the lesson is clear: treat the Santa Rally as an interesting historical pattern, not an investment thesis.

We stress to our clients that time in the market – rather than trying to time the market – is a far more prudent strategy for most investors.

Guided by our Anchor & Cycle investment process

For our investment decision-making, we rely on our Anchor & Cycle investment process which blends long-term analysis with tactical agility. This has guided us to remain risk-on in our portfolios since late 2023 and has served us well.

We recently released our Investment Outlook 2026, which reiterated a strong principle of ours as we looked back on the lessons of 2025. It points out that “sound portfolio management requires a holistic view, not a fixation on a single metric”.

When making investment decisions we examine a wide range of factors. These include changes in economic growth, inflation, and monetary and fiscal policy. In 2025, all these elements continued to paint a positive picture of stock market performance over the medium term and, as a result, we remained overweight equities throughout the year. 

As we head into 2026, we continue to hold an overweight position in global equities. Our analysis shows that ongoing earnings growth could continue to drive the market higher, driven by robust economic growth, easy policy, and ongoing adoption of artificial intelligence – the latter of which is still in its infancy (see chart below).

With all those fundamental factors influencing financial markets, Santa’s impact is actually pretty minimal – he can instead focus fully on delivering presents.