A Santa Claus rally is a period where stocks and other assets bounce back in weeks before Christmas. It is often seen as a good time to invest in assets like shares, cryptocurrencies, and other assets like commodities and exchange-traded funds (ETFs). In this article, we will look at what a Santa rally is and some of the best stocks to invest in during the period.
What is the Santa Claus rally?
The stock market has some seasons throughout the year. For example, historically, the market tends to lag in the summer months. This happens since many institutional investors are usually traveling during the period.
Another seasonality is the fact that stocks tend to decline in September. In 2021, September was the worst month for the S&P 500.
The Santa Claus rally is another seasonality period in the market. This rally is derived from the fact that Santa Claus is a well-known figure who brings gifts to children during the Christmas season. Historically, most assets tend to do well a few weeks before Christmas. This performance is what is known as a Santa Claus rally.
When does the Santa Claus rally start?
There is no specific date when the rally starts. However, in the past, many investors believe that it starts about three weeks before Christmas. For example, in 2020, the S&P 500 gained about 2.5% between December 1 and Christmas.
In 2019, the index gained about 5%. Therefore, if you are committed to riding the Santa rally, it makes sense to be bullish before December starts. Still, some investors believe that the rally starts about six days before Christmas.
Santa Claus rally history
The concept of a Santa rally goes way back to the 1970s. According to the CME Group, the concept of the rally was coined by a trader who identified that equities tended to rally towards Christmas. Precisely, the trader noted that the S&P 500 index rose by about 1.3% in the Santa rallies that happened between 1950 and 1970.
Santa Claus rally statistics
So, does the Santa rally work? In most cases, stocks tend to do well in the two weeks leading to Christmas. Indeed, a study by the CME noted that the S&P 500 index has risen by about 1.3% on average since the 1950s. These gains have been more pronounced in the past few years. For example, since 1993, the S&P 500 index has risen about 67% of the time.
Still, some years are better than others. For example, at the end of 2008, the S&P 500 index rose by more than 6% in the few weeks leading to Christmas. This was notable since it happened during the financial crisis.
Another great performance was in 2018, when the S&P 500 rose by more than 5%. This happened after the Fed announced that it would start easing. This is after it made a series of rate hikes during the year.
Best stocks for the Santa Claus rally
Ideally, stocks in most industries do well during a Santa Claus rally. So, which are some of the best buys for the 2021 Santa rally? This year, the focus among investors will be on the rising inflation, high energy prices in Winter, and the likelihood of more Fed tightening. So, here are a few picks for this Santa rally.
Nvidia (NVDA)
The Nvidia stock price has been in a spectacular rally in the past few years. The shares have jumped by more than 140% this year, bringing its total market capitalization to over $731 billion. This makes the company the biggest semiconductor firm in the world. Indeed, it is bigger than Intel and AMD combined.
Nvidia’s rally has been because of the rising optimism about its business. As the world gets more digitized, its hardware and software will be in high demand. Think about the metaverse, Bitcoin mining, autonomous cars, and other technologies. Indeed, the company reported a strong quarter this week as its revenue and EPS surged to $7.1 billion and $1.17. Therefore, with this momentum building, there is a likelihood that the stock will do well during the Santa rally.
PayPal (PYPL)
PayPal is a company that is under pressure. The company’s stock has crashed by more than 30% from its year-to-date high. Indeed, it still has bearish momentum after a series of downgrades.
However, this drop has left the stock relatively cheaper than its peers. Besides, the firm has more than 425 million active users, and its business is growing. Therefore, there is a likelihood that investors will do some statistical arbitrage and buy the dips of the stock.
Goldman Sachs (GS)
Goldman Sachs’s stock price has surged by more than 50% this year. This makes it one of the best performers in the S&P 500 for the second year in a row. The stock could continue rallying during this year’s Santa rally. This is because inflation is rising, and the unemployment rate has retreated.
Therefore, there is a likelihood that the Fed will turn more hawkish in its December meeting. This will likely push more investors to financials. Besides, Goldman Sachs has a cheaper valuation than its peers.
Meta Platforms (FB)
Facebook has had a relatively difficult year as the stock has risen by more than 30%. Still, it has retreated by about 11% from its highest level this year. This decline is mostly because of Apple’s iOS 14 upgrade that has pushed advertisers away. It is also mostly due to the allegations about the company’s inner workings.
Still, like PayPal, Facebook is an excellent brand that is also the second-biggest online advertiser in the world. The company is also a cash flow machine and has a strong market share in its business. Therefore, there is a likelihood that the stock will do well in this Santa Claus rally.
Notable mentions
There are several other companies that we believe will outperform in this rally. In finance, companies like Morgan Stanley, Wells Fargo, and PNC Financial are expected to do well. In energy, expect companies like Chevron, Devon Energy, and ExxonMobil to grow as energy prices rise. In technology, investors will likely buy the dips of companies like Snap and Roku.
