Solid Santa Claus Rally Is Signaling Strong Year for Stocks

(Bloomberg) -- Santa Claus delivered a late gift to investors, with the S&P 500 index posting its biggest gain during the so-called Santa Claus rally in nine years, according to LPL Financial, potentially signaling a healthy 2022 for U.S. stocks.

Tuesday marked the official end to the “Santa Claus rally,” a historically strong period for stocks that includes the last five trading sessions of the year and the first two trading days of the new year. Since 1969, the S&P 500 index has averaged a gain of 1.3% over the seven-day span, according to the Stock Trader's Almanac.

The benchmark index climbed 1.4% in that period through Tuesday's close, notching its best Santa Claus rally since the seven-day stretch that started at the end of 2012 and into early 2013, according to LPL Financial. The S&P 500 edged lower on Tuesday, dipping 0.1%, after closing at an all-time high on Monday.

“The interest in the Santa Claus Rally barometer has more to do with the forecast for the year ahead than for the year just past,” Sam Stovall, chief investment strategist at CFRA Research, wrote in a note to clients.

The kinds of gains seen recently have historically been a harbinger of a strong year ahead for the market, because they signal that institutional investors are buying.

The first half of December is typically weaker for stocks as tax-loss selling dominates trading. Then in the second half of the month money managers snatch up bargains when retail investors leave for the holidays. When these buyers are absent, something could be amiss in the stock market, according to experts.

Since 1945, the S&P 500 has enjoyed a favorable price change in this seven-day period more than three out of every four years, rising an average 1.2% in price, according to Stovall.

“The failure of stocks to rally during this time has tended to precede bear markets or times when stocks could be purchased at lower prices later in the year,” Jeffrey Hirsch, editor of the Stock Trader's Almanac, said in a note.