Here is what a Santa rally is and whether or not long suffering investors can expect one in 2023

There is a stock market phenomenon known as a Santa rally. We thought we’d take a look at what this is, and whether or not long-suffering ASX investors can expect one this year.

What is a Santa rally?

The Santa rally is a phenomenon that has been observed in the stock market, where there tends to be a rise in stock prices during the month of December. This period typically starts around the week before Christmas and continues until the first few days of January.

Although there isn’t a definitive reason for this rally, it is believed to have originated from the holiday spirit and optimism towards the upcoming new year. Many investors tend to be more generous during this time of the year and are willing to take on more risks, which can drive up stock prices.

Tax loss selling?

Some also attribute the Santa rally to tax-loss harvesting, where investors sell off their losing stocks towards the end of the calendar year for tax purposes, causing a temporary dip in prices – keep in mind the US uses the calendar year for tax purposes, not July 1-June 30. This creates an opportunity for other investors to buy at a lower price, leading to an increase in demand and subsequently driving up stock prices.

Furthermore, the holiday season can also bring about positive news and events for certain industries, such as retail or travel. This can create an overall sense of positivity and optimism in the market, resulting in higher stock prices. However, it is important to note that the Santa rally is not a guaranteed occurrence and does not happen every year – indeed, it did not happen last year. In fact, there have been even been some instances where the market experiences a downturn during this period, so it is always wise to approach with caution and do thorough research before making any investment decisions.

Should investors expect a rally this year?

No, we don’t think investors should get their hopes up for a Santa rally. This is not to say that some companies won’t make some gains – long-suffering retail stocks might get a lift from holiday spending. But, so far as a market-wide rally that wipes out the losses of the year is concerned, we are not so convinced.

Most particularly, we do not see a potential catalyst that would lift the broader equity market. The US budget deficit continues to be a problem, bond rates remain particularly high (leaving this option as as better option than the equity markets), inflation is proving a very tough beast to slay and consumer spending is uncertain. And we haven’t even mentioned the uncertain geopolitical situation, what will occur in Ukraine as well as in Israel and the Gaza Strait. Whatever happens will have implications for investors, even if things continue the way they are for several months to come.

Yes and no

All this being said, there is the possibility that all these trends turn out better than anticipated and markets rallying accordingly. Whilst we wouldn’t bet on it, we wouldn’t rule it out with 100% certainty either.

Nonetheless, we state again that irrespective of what the broader markets do, there will always be individual stocks that do better or worse than the market. Yes, it is harder to find good stocks when the markets are dour, but it is not impossible. And so rather than ponder whether or not to invest on the basis of a Santa rally, we think investors should instead consider which individual stocks are poised to defy the market and do well.

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