Capitalising on the ‘Santa Claus rally’

As the end of each year approaches, there are often more favourable conditions in investment markets in a phenomenon known as the Santa Claus rally.

Speaking with ifa, AMP chief economist Shane Oliver explained that this rally typically begins from around mid-December and continues through to January.

“It’s part of a period of broader seasonal strength that often gets underway in the US in October, or late October going into November. Historically, November is the strongest month of the year in US shares and December is fairly solid as well,” he said.

According to Dr Oliver, 2023 has so far been fairly consistent with the traditional pattern.

“We saw the weakness through August, September, October. They’re often weak months, and then we’ve seen strength kick in through November,” he stated.

“So far, you could say, ‘Well, so far, so good’. The seasonal strength that you get around this time of year seems to be on track.”

Dr Oliver pointed out that Australia often lags behind its peers, with strength often not emerging until December.

“It does normally take a bit longer in Australia to get underway,” he said.

Ideally, Dr Oliver added, anyone looking to take advantage of the Santa Claus rally would need to anticipate the rally.

“If we’ve seen weakness into September and October, then you use that to buy in. I think that’s probably the best way to play it,” he said.

“There’s a bit of an opportunity in early December, if you missed out in November, because markets have that sort of pullback in the first couple of weeks of December. And then you tend to get strength continuing on again after the overbought conditions are worked off, so you can use that to top up if you missed out initially, but the ideal is to get in ahead of it.”

However, it could be tough to plan a strategy around this seasonal trend, in part because there is no solid understanding of exactly why it seems to materialise most years, though the AMP chief economist did note a range of possible factors.

“There’s often a feel-good factor at the end of the year. People might get paid bonuses, some of that money might find its way into markets,” he said.

Dr Oliver also highlighted the reversal of tax loss selling in the US. Since the US financial year ends in September, individuals may sell stocks into September that have had a capital loss to reduce their capital gains tax bill.

Investors may then buy back into stocks through the latter part of the year to rebuild their exposure to markets.

“It’s also a time when there’s not a lot of capital raisings. So, IPOs and those sorts of things slow down to a crawl and then virtually stop, which I think is a key factor enabling that Santa rally to get underway,” Dr Oliver added.

“There’s money coming into the market, but there’s not as much getting sucked out there in capital raisings. So that’s sort of what happens around the end of the year. It’s normally a more benign period of the markets.”

However, Dr Oliver highlighted that the Santa Claus rally is not always guaranteed to occur, including in the current year.

“This time around, there’s lots of uncertainty, although you could have argued there was a year ago and before that as well. In most years, there’s always things to worry about, whether it’s the pandemic or inflation or interest rates or geopolitics,” he said.

“At the moment, it’s that uncertainty is particularly acute around what central banks might do. Fortunately, we don’t hear much from central bank staff at the latter part of December going into January. They really don’t come back to the fore again till the end of January and then going into February, so we get a bit of a reprieve from central banks.”