By Thong Nguyen 13 December 2016
In this post, I will be providing some quantitative analysis which may provide some insight into how we can use past history to help us understand market behaviour at this time of year. I’m sure many of you have heard of the Christmas rally – the tendency for sharemarkets to rise over the end of year Christmas period. The question is, just like Santa, is the Christmas period rally actually real? And if so, why does it exist?
Well, to answer the first question – from a historical perspective, the Christmas rally is real! The S&P 500 index has on average between 1928 and 2015 risen 1.29% in the 2 weeks around Christmas. This compares to an average 2-week return for the S&P 500 of 0.29% during the years analysed (i.e. across the year). The data indicates that markets tend to rally at the end of the year either side of Christmas with volume being significantly lighter. More generally it should be noted, when markets do decline heavily, it is usually associated with higher volume. It can be postulated that this higher volume is typically caused by institutions and money managers selling stock, meaning it isn’t the average retail investor causing markets to decline sharply.
This observation helps us unravel the mystery of the Christmas rally. Why? Well, where do most of the institutions and money managers go around Christmas? On holiday of course! Hence volumes are very light during the holiday period. If these market participants are not there to sell stock, markets typically remain neutral to bullish, and I believe this is why the Christmas rally exists. So if this is true, wouldn’t you expect an Easter Phenomenon as well?
So let’s see if there is evidence of an Easter rally. If I calculate the average 2-week return around Easter, and if my hypothesis is true, you would expect a return higher than the typical 2-week return of 0.29%. In fact, this return is 0.68% over the past 87 years, and 1.62% over the past 20 years vs. 0.34% over this same period. This helps to lend further weight to my hypothesis – markets tend to rally around holidays in general, not just Christmas. Of course, past performance is not indicative of future performance, but you may wish to keep this market behaviour in mind when investing around this time of year!