For years, the phenomenon known as the Santa Claus Rally has mystified traders. It’s a recurring pattern at the end of each year, where the stock market tends to rise, for reasons still largely unknown.

With the next anticipated Santa Claus Rally fast approaching, I believe right now is an ideal time to understand what it is, some theories on why it happens, and how traders can prepare.

What is the Santa Claus Rally?

The Santa Claus Rally typically occurs during the last five trading days of the calendar year, and first two trading days of the new year. It describes the tendency for the stock market to rise during this time period. Based on the 2025 calendar, this year’s Santa Claus Rally would start on Wednesday December 24, and end on Monday January 5.

It was first described in 1972 in the Stock Trader’s Almanac by Yale Hirsch. He noted a recurring phenomenon of sustained increases in the stock market during the last trading week of December, and first two trading days of the new year.

Historically, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite have respectively averaged increases of 1.3%, 1.4%, and 1.8% during this timeframe. Since the mid-1900s, there have only been six times where the Santa Claus rally didn’t occur in December. During those six instances, January was the lower of them, and the full calendar year only saw a solid gain just once.

What Causes the Santa Claus Rally?

For the most part, there’s no universally accepted reason for what causes the Santa Claus Rally. Any potential reasons are mostly based on theory and speculation. Some of the most common causes that have been proposed range from institutional investors and anticipation of the new year, to tax harvesting and holiday spending.

Let’s look at a few of the most common potential causes behind the Santa Claus Rally:

Absence of Institutional Investors: It’s widely known that institutional investors have one of, if not—the biggest impact on how the market moves. Some who believe this theory claim that institutional investors tend to go on vacation during the last week of December, meaning they aren’t investing in the market. As a result, retail traders—who are generally more bullish—would largely drive the market during this timeframe.

The January Effect: This hypothesis proposes that there is a seasonal anomaly causing stock prices to increase in the month of January more than any other month. Since many well-informed traders are aware of it, it’s believed that the heightened buying activity at this time of year is caused by their anticipation of the January Effect.

Slowdown in Tax Loss Harvesting: Tax loss harvesting is a strategy investors can use to reduce capital gains taxes owed from selling profitable investments, by selling an asset at a net loss. The deadline for tax loss harvesting in the United States is December 31, so all trades must be settled before then to count for the current tax year. Tax loss harvesting usually peaks in Q4, but tends to subside in late-December. It’s believed that the decrease removes an artificial drag on the market, allowing prices to rise in the final trading days of December.

Optimism Over the New Year: This is among the more speculative causes behind the Santa Claus Rally. A new year marks a new beginning—a clean slate, and fresh start for many people. Whether it’s the euphoria from holiday cheer, extra cash from holiday bonuses, or “window dressing” by bigger players in the market, some believe this positive sentiment and anticipation of the new year compels many traders to buy, causing stock prices to climb in the final days of December.

Holiday Spending: It’s no secret that people open their wallets during the holidays. Shoppers are spending money on gifts, travel, and food. This annual spending boost can signal economic health that affects a wide range of stock market sectors. Although heightened consumer activity at this time of year can create upward momentum as investors anticipate strong quarterly earnings, one should note that it’s merely a tendency…and not a guarantee.

Is a Santa Claus Rally on the Way?

In short, it depends on who you ask, and how you interpret historical data. If you caught my MarketMinds episode on December 16, you’ll hear me mention how a good amount of traders on the CBOE floor aren’t too optimistic.

However, history seems to tell us otherwise, based on what the historic data shows.

SOURCE: macrotrends.net

Take the S&P 500 for example. Since 1929, the S&P 500 has risen in 79% of Santa Claus Rally periods, with an average return of 1.6%. Since 1950, the S&P 500 has posted positive results 79% of the time, averaging a 1.3% return during that timeframe.

In the last 75 years, the last two weeks of December have been the best weeks for stocks.

Now here’s a more recent statistic that I found particularly interesting…

Over the last eight years, the S&P 500 declined only once during the Santa Claus Rally.

That means in the last eight years, the S&P 500 was positive during the Santa Claus Rally 87.5% of the time. In essence, when compared to the last 75 years, the S&P 500 has risen during this time period over 10% more often in the last eight years.

If these numbers are any indication, then history is most certainly on our side.

The S&P 500’s Big Move: Why This Year Could Be Different

Here’s why I believe this year’s Santa Claus Rally could have something unprecedented up its sleeve…

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Here’s why I believe this year’s Santa Claus Rally could have something unprecedented up its sleeve…

The S&P 500 is about to do something big; something it’s only done eight times in the last 100 years.

The index has produced returns 15% or more for three consecutive years only eight times since 1926. If it continues at its current pace, then 2025 would be the latest instance of this winning streak.

Prior to that, the last time the S&P 500 posted three consecutive years of 15% gains was from 2019-2021. It had a net loss of 19.44% the following year in 2022.

There’s no clear historical pattern that indicates what could happen in the fourth year.

In half of those instances, the S&P 500 continues its streak into the fourth year. It ended after the third year in the other four cases.

During the S&P 500’s 100 years as a daily stock index, it gained at 15% roughly half the time…however, it’s worth noting that stringing together three consecutive years of those returns at those levels has proven to be extraordinarily difficult. Since the S&P expanded to 500 stocks, the index only had four cases where it saw three consecutive years of 15% or more gains.

To bring things full circle, what happens in 2026 is anyone’s guess.

Conclusion

If the technicals and historical data are any indication on whether we should expect a Santa Claus Rally in 2025, all I would say is to hope for the best.

While “hope” is obviously not a great strategy—and I’m by no means saying you should be bullish or bearish—but when it comes to expectations, I consider myself an odds guy.

Based on what the data shows, the odds tell us there’s a great chance we have a Santa Claus Rally.

However, I think it’s important to keep the headwinds in mind that the market is currently facing.

We’re still catching up on a lot of economic data. This week, for example, we’re getting some important inflation and PCE data, which could strongly impact the market’s near-term movement. Although the Fed is lowering rates, they’re still moving higher…and we’ve all seen firsthand how sensitive the market can be to those metrics.

However, market volatility is still cheap. For any traders who are optimistic about an anticipated Santa Claus Rally, they could consider keeping positions on and take some hedges. Otherwise, there’s nothing stopping anyone from potentially fading the rally.

Nonetheless, while the historic data seems to be in our favor, nobody can predict the future…so whether we see a Santa Claus Rally in 2025, and what happens in 2026, is ultimately anyone’s guess.