Santa Claus rally? Don't take stock in it.
The 'Santa Claus rally' – a run-up in markets spurred by holiday spending and hiring – is a long-held stock market myth. There are countless theories about how holiday sales correlate to the economy and stock market, but the average investor shouldn’t make any major shifts in their investment plan based on them.
The holiday season is fast approaching, and projections for this year’s holiday spending are out. The National Retail Federation predicts retail sales in November and December will exceed $616 billion, a 4.1% improvement over last year’s holiday season – and the largest seasonal sales increase since 2011.
They also expect 750,000 to 800,000 seasonal jobs will be created. Consumers are spending more and there will be an influx of short-term employment opportunities. This positive news is surely a reflection of an improved economy and will spill over to the stock market, right?
Maybe. Numerous studies exist that show absolutely no correlation between critical retail dates like Black Friday and the stock market’s performance. However, those who buy into Keynesian economics may argue that the increase in spending can drive economic improvement, and in turn investor confidence.
While there are countless theories about how holiday sales correlate to the economy and stock market, the only certainty is that the average investor shouldn’t make any major shifts in their investment plan based on expectations of how retail sales projections may impact the markets.
Let’s say, for example, you decide to purchase shares of a large retailer who’s priced relatively low and could benefit from a strong increase in consumer spending. If actual sales fall short of this projection, or the retailer doesn’t experience the sales increase as strongly as others, you may be looking at losses.
During the late fourth quarter, investors may also try and account for something called the Santa Claus rally or December effect, which is a rise in stock prices that usually occurs during the final week of December. This trend is primarily attributed to investors acting in anticipation of an expected injection of funds after the first of the year. Other explanations for this trend are employees reinvesting their year-end bonuses or an upbeat, positive sentiment on Wall Street with the holidays in full swing.
When considering whether to try and take advantage of the Santa Claus rally, ask yourself whether you’re really willing to take a chance the stock market may go up because investors are feeling “festive.”
Between now and the end of the year, the news will be inundated with statistics tracking retail sales and other normal seasonal trends. Although interesting, these seasonal trends are not guaranteed and virtually impossible to act on. Instead of trying to make a short-term gain, focus on executing a solid long-term investment strategy that already accounts for the ups and downs investors experience in the stock market.
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