Abstract/Summary

In 1897, the American newspaper editor Francis Pharcellus Church penned a famous reply to a young reader who wrote in with doubts about the existence of a certain old man in a red suit who spent a lot of time around chimneys: “Yes, Virginia, there is a Santa Claus”. The average investor is a little older than eight-year-old Virginia, but this is the time of year when they raise their own doubtful version of this question – namely, will there be a “Santa Claus rally” before the end of the year? In the financial press jargon, the Santa Claus rally refers to an expected increase in stock market returns at the end of the year. The reference to Christmas is actually a little misleading, because the rally typically refers to the last five trading days of the old year and the first two trading days of January. Unlike the old man in red, there is certainly no doubt that Santa Claus rallies do exist. They have failed to visit Wall Street only five times in the past 20 years, creating a profitable opportunity to buy shares just before the rally starts and then sell just before it ends. Not only that, the absence of a Santa Claus rally has been associated with a weaker January, rendering it an important indicator.