The many advisers forecasting a “Santa Claus rally” for U.S. stocks are too eager. That’s because the only year-end seasonal strength worthy of being called a Santa Claus rally doesn’t begin until after Christmas. The Thanksgiving-until-Christmas period does not itself exhibit any statistically significant rally potential.
To be sure, none of the advisers forecasting a Santa Claus rally after Thanksgiving bother to define exactly when it is supposed to begin and end. So refuting it is tricky. To do so, I measured the Dow Jones Industrial Average’s
gain from Thanksgiving to its highest close in December. Though you would need perfect clairvoyance in order to realize this gain, it represents the theoretical maximum for such a rally. Since 1896, when the Dow was created, its average gain when measured this way is 3.35%. That may appear impressive — the equivalent of more than 1,100 Dow points currently —but isn’t really. When other months’ rally potentials are measured in a similar way, many exceed that of the post-Thanksgiving period. This is illustrated in the chart below. To construct it, I calculated for each month the average rally from its fourth Thursday (the equivalent of Thanksgiving) to the subsequent month’s high. As you can see, seven other months have a larger rally potential than for the period that begins after Thanksgiving.