The Christmas rally is a well-known phenomenon in the stock market, particularly in the United States. It refers to the tendency of stock indices to rise sharply in the last few weeks of the year, often driven by consumer spending, corporate earnings reports, and positive investor sentiment.
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The Consumer Storm
The term ‘Christmas rally’ originated in the United States. According to U.S. experts, the Dow Jones index has risen in December in 80% of cases since its creation in 1896. The average monthly gain in December is approximately 0.5%, while the average December performance is around 1.4%. Historically, American consumers go on a shopping spree before Christmas, leading to increased sales for retailers who boost demand with holiday discounts and promotions. As a result, consumer sector stocks often lead the Christmas rally.
Phases of the Christmas Rally
The growth of stock prices can be divided into two phases. The first phase is the actual Christmas rally, which lasts until December 24th. After Christmas, the second phase, known as the Santa Claus Rally, takes place until December 31st. This division is somewhat arbitrary, as the causes are similar. On Wall Street, there’s a joke that the market rises because all the pessimists are on vacation. Americans, who love visual effects, even have a superstition: if it snows in Boston on Christmas, stocks will rise.
The Christmas Rally in Russia
Despite its popularity among market participants, the Christmas rally has not always lived up to expectations in recent years. Over the past decade, the U.S. stock market’s Christmas rally failed four times. In Russia, starting from 1995 (when the RTS was introduced), the Christmas rally was only disrupted during the 1998 crisis. The average growth of the Russian market in December, excluding 1998, was 11.5%.
The Russian New Year rally differs from its U.S. counterpart. It is not always as strong. For example, in December 2000 and 2004, the Russian market grew by just 3%. The most intense growth usually occurs in the second half of December, giving investors who missed the opportunity to build a portfolio a chance to jump on the train.
Another interesting feature of the Russian rally is that the market tends to grow more strongly in odd years than in even years. However, a rise in oil prices does not always lead to a rally in the Russian market. For instance, in December 2002, oil prices rose by 14%, but the RTS index only gained 2%. Conversely, in December 1999, the Russian stock market had a strong rally while oil prices fell by 1%.
It is possible to profit from the Christmas rally, but it should be seen as an additional catalyst for stock price increases. If the market conditions are favorable for rising stocks, the Christmas rally can amplify this trend through holiday optimism. Psychological reasons for growth are always present. People tend to find patterns in chaos, and traditions in the stock market are a clear example of this. Observing the pre-holiday stock price increase may lead one to believe in market anomalies, but these can often be explained through common sense and market psychology.
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FAQ
What is the Christmas rally in the stock market?
The Christmas rally refers to the tendency of stock markets to rise sharply in the final weeks of the year, often due to increased consumer spending and positive investor sentiment.
Why does the Christmas rally happen?
The Christmas rally is driven by factors such as increased consumer spending during the holiday season, corporate earnings reports, and optimistic investor sentiment.
Is the Christmas rally reliable for investing?
The Christmas rally is not a guaranteed indicator, but it can act as a catalyst for stock price increases when market conditions are favorable.
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