Santa Rally: What It Is and Can It Happen in 2025?

The significance of the Christmas holiday extends beyond its religious and commercial dimensions. While it holds cultural importance as a time for exchanging gifts, it also plays a notable role in the financial realm, particularly in the stock market. 

This phenomenon, commonly referred to as the "Santa Rally," has captured the attention of investors and traders for over five decades. According to research from LPL Financial, the S&P 500 has generated an average return of 1.3% during the Santa Rally period since 1950, with positive returns occurring 79% of the time.

However, 2024 presented an anomaly. The S&P 500 declined by 2.4% in December, marking only the third monthly decline of the year, despite posting an impressive 23.3% annual gain. This raises important questions about the reliability of seasonal patterns and what investors might expect in 2025.

In this comprehensive guide, we explore the impact of Christmas on stock markets, explain what a Santa Rally is, examine the historical patterns and underlying factors that contribute to this market phenomenon, and analyse whether conditions favour a Santa Rally in 2025.

TL;DR

• A Santa Rally is a market phenomenon where stocks tend to rise during the final week of December and the first two trading days of January

• The term was coined in 1972 by Yale Hirsch in the Stock Trader's Almanac 

• Historical success rate: Since 1950, the S&P 500 has posted positive returns during this period 79% of the time, with an average gain of 1.3% 

• 2024 was an exception: Despite the S&P 500 gaining 23.3% for the full year, December saw a 2.4% decline, marking a rare failed Santa Rally 

• Contributing factors include holiday optimism, lower trading volumes, tax-loss harvesting, institutional portfolio adjustments, and the related "January Effect"

• Not guaranteed: Market conditions, economic factors, and investor sentiment can override seasonal patterns

What Is a Santa Claus Rally?

A Santa Rally refers to a tendency of markets to move higher in the final couple of weeks of the year, leading up to Christmas. There is some debate over the exact timeframe that constitutes a Santa rally, whether it is the week before Christmas or the week after, and whether it includes the first two days of the new year. 

According to research published on ResearchGate, stock returns are statistically significantly higher during the Santa Rally period compared to random seven-day periods throughout the year. Over the seven trading days in question, stock prices have historically risen 76% of the time.

The week after Christmas is known to be especially quiet, with markets typically range-bound with low trading volume. Many traders take the holidays off, and market makers would be expected to make year-end position adjustments while ample liquidity remains after Christmas. 

What Causes a Santa Rally?

A Although the reasons behind the Santa Rally aren’t known for sure, there are abundant theories to explain the phenomenon. Here are some:

• Traders may be more positive due to the holiday spirits. 

• Institutional investors often take time off during the holidays, leaving markets to retail traders who tend to be more bullish.

• Many people receive holiday bonuses and might invest extra funds into savings or mutual funds. 

• Investors may balance their books before the fiscal year ends to optimise their tax position, known as the "January Effect." 

Portfolio managers may "dress up" their holdings by buying assets that performed well during the year to make their positions look more attractive.

The History of the Santa Rally

Who Coined the Term “Santa Claus Rally”? 

The term "Santa Claus Rally" was introduced in 1972 by Yale Hirsch, the founder of the trading guide, "The Stock Trader's Almanac." 

Hirsch scrutinised market trends and identified a phenomenon during the last five trading days of one year and the initial two trading days of the subsequent year, whereby stocks experienced a surge of over 79%, propelling the S&P 500 to new heights. 

Furthermore, The Stock Trader’s Almanac examined data spanning from 1950 to 2022 and concluded that a Santa Claus Rally occurred 58 times during this period, accompanied by an average growth of 1.4% in the S&P 500.

Historical Performance Analysis

The Stock Trader's Almanac analysed data spanning from 1950 to 2022 and concluded that a Santa Rally occurred 58 times during these 73 years. This pattern was accompanied by an average growth of 1.3% in the S&P 500, with positive returns occurring approximately 79% of the time.

Over the seven trading days in question, stock prices have historically risen 76% of the time, substantially more than the average performance over random seven-day periods throughout the year.

Notable Exceptions

Whilst the Santa Rally has been remarkably consistent, there have been notable exceptions. Years that failed to produce a Santa Rally have sometimes preceded bear markets or periods when stocks could be purchased at lower prices later in the year.

The 2024 holiday season provides a recent example. Despite the S&P 500 gaining 23.3% for the full year 2024, December saw a 2.4% decline. This marked only the third monthly decline of the year and the first failed Santa Rally since 2015.

Market factors that contributed to the 2024 decline included persistent inflation concerns, hawkish Federal Reserve policy signals, and rising bond yields that made fixed-income investments more attractive relative to equities.

The January Effect and Its Connection to the Santa Rally

What Is the January Effect?

The "January Effect" is a related seasonal phenomenon characterised by a perceived upswing in stock prices during January, particularly in the first two weeks of the month. This trend is often attributed to increased buying activity driven by several factors.

According to market research, the January Effect typically encompasses:

• Tax-loss harvesting reversal: Investors who sold losing positions in December for tax purposes re-enter the market in January

• New year investment resolutions: Individuals deploy fresh capital as part of their new year financial goals

• Bonus deployment: Holiday and year-end bonuses received in late December are invested in early January

Pension contributions: Many investors make annual pension contributions at the start of the calendar year.

Small-Cap vs Large-Cap Performance

Academic research suggests that the January Effect is more pronounced in small-capitalisation stocks compared to large-cap equities. This may be because small-cap stocks experience greater tax-loss selling pressure in December (due to higher volatility throughout the year), creating more pronounced rebounds in January.

Certain studies also indicate that value stocks outperform growth stocks in January, potentially due to their greater involvement in tax-loss harvesting strategies during the preceding month.

Overlap with Santa Rally

The Santa Rally and January Effect overlap during the first two trading days of January. Some analysts view these as interconnected phenomena, whilst others treat them as distinct patterns. Regardless, both represent seasonal tendencies that have been documented across multiple decades of market data. (Source: Forbes)

How to Trade During a Santa Rally

For traders interested in potentially capitalising on seasonal market patterns, several approaches merit consideration:

1. Conduct Historical Pattern Analysis

Examine historical price patterns for specific indices or sectors to identify how they typically perform during the Santa Rally period. Not all market segments participate equally; some sectors may show stronger seasonal tendencies than others.

2. Monitor Market Conditions

Assess current market conditions against historical Santa Rally years. Consider factors such as:

• Overall market valuations

• Federal Reserve policy stance

• Inflation trends

• Consumer confidence levels

• Trading volume patterns

3. Implement Risk Management

Given that the Santa Rally is a tendency rather than a guarantee, implementing robust risk management is essential:

• Set stop-loss orders to protect positions if markets move contrary to expectations

• Position sizing: Limit exposure to an amount you're comfortable risking 

• Time-limited trades: Consider exiting positions by a predetermined date if the expected price movement doesn't materialise

4. Develop a Trading Plan

Create a comprehensive trading plan that includes:

• Entry criteria and timing

• Position size

• Target profit levels

• Stop-loss parameters

• Exit strategy if the trade remains flat by a specified date

This proactive approach can enhance your ability to navigate the uncertainties of seasonal market patterns whilst managing risk appropriately.

Visit the Plus500 Trading Academy for more educational resources on trading strategies and risk management..

2024 Market Review: A Failed Santa Rally

The 2024 holiday season provided an instructive case study in why seasonal patterns cannot be relied upon with certainty. Despite the S&P 500 posting an exceptional 23.3% gain for the whole year, December proved to be a challenging month for equity investors.

December 2024 Performance

The S&P 500 Index declined 2.37% in December 2024. This represented only the third monthly decline of the year, following losses in April and October. Despite this setback, the index still closed out an extraordinary year, with 2024's 23.3% return adding to 2023's 26% gain, the best two-year performance since 1998.

Contributing Factors to the 2024 Decline

Several factors contributed to the failed Santa Rally in 2024:

• Federal Reserve Policy Signals The Federal Reserve maintained a hawkish stance on interest rates, with signals suggesting fewer rate cuts in 2025 than markets had anticipated. This tempered enthusiasm for risk assets.

• Elevated Valuations By late 2024, the S&P 500 was trading at forward earnings estimates well above historical averages. This made equities vulnerable to profit-taking.

• Sector Weakness Eight of the 11 S&P 500 sectors were in negative territory in December, indicating broad-based weakness rather than isolated declines.

• Bond Market Competition Rising bond yields made fixed-income investments more attractive relative to equities, drawing capital away from stock markets.

The Historic Reversal

• 2024-2025 marked a historic first: the S&P 500 completed a "reverse Santa Rally" by declining during every business day between Christmas and New Year's. This had never occurred before in the index's history.

• This exceptional outcome reinforces an important principle: Seasonal patterns are tendencies based on historical averages, not guarantees of future performance.

Could There Be a Santa Rally in 2025?

As we look ahead to the 2025 holiday season, several factors could influence whether markets experience a traditional Santa Rally.

Analyst Forecasts for Year-End 2025

Major financial institutions have published their year-end 2025 targets for the S&P 500:

• J.P. Morgan: Expects the S&P 500 to close near 6,000 by year-end, supported by double-digit earnings growth

• Goldman Sachs: Projects the index to reach 6,600 in the next six months, representing a 6% increase from current levels 

These forecasts suggest continued market strength through year-end, which would support conditions for a Santa Rally.

Factors That May Support a 2025 Santa Rally

• Earnings Growth Trajectory Analysts project the S&P 500's earnings to continue growing in 2025.

• Economic Resilience Despite concerns about potential slowdowns, the global economy has shown ongoing resilience, with J.P. Morgan Research noting continued strength in key economic indicators.

• Seasonal Patterns Reasserting After the 2024 anomaly, historical patterns may reassert themselves in 2025, particularly if market conditions stabilise.

Potential Headwinds

• Valuation Concerns: The S&P 500 continues trading at elevated valuation multiples, which could limit upside potential and make markets vulnerable to corrections.

• Geopolitical Uncertainties: Ongoing trade tensions and geopolitical developments could create volatility that disrupts seasonal patterns.

• Monetary Policy Evolution: Central bank policy decisions, particularly regarding interest rates, will significantly influence market direction.

The Verdict

Whether 2025 produces a Santa Rally will ultimately depend on the interplay between seasonal tendencies and prevailing market conditions. Whilst historical patterns favour gains during this period, the 2024 experience demonstrates that contemporary factors can override seasonal norms.

Investors and traders should monitor economic data, Federal Reserve communications, and market sentiment indicators as December 2025 approaches. Check the Plus500 Economic Calendar for upcoming events that may influence market direction.

Trading Instruments During a Santa Rally

For those looking to participate in potential Santa Rally movements, several instruments merit consideration:

• S&P 500 Index 

Trade the broad US market benchmark through S&P 500 CFDs, allowing exposure to the overall market trend without selecting individual stocks.

• Individual Shares

Access specific companies that historically perform well during the Santa Rally period through Shares CFDs.

• Sector-Specific Indices

Target sectors that tend to outperform during year-end rallies, such as consumer discretionary, technology, or financial stocks.

• Small-Cap Indices

Given the connection between the Santa Rally and January Effect, small-cap indices may offer opportunities for traders focusing on this seasonal pattern.

For comprehensive market analysis, explore Plus500's insights section.

Common Misconceptions About the Santa Rally

• Misconception 1: The Santa Rally Happens Every Year

Reality: Whilst the pattern occurs approximately 79% of the time, it is not guaranteed. Market conditions, economic factors, and investor sentiment can override seasonal tendencies, as demonstrated in 2024.

• Misconception 2: The Santa Rally Guarantees Profits

Reality: Even when a Santa Rally occurs, the average gain of 1.3% is relatively modest. Transaction costs, timing issues, and individual stock selection can easily erode or eliminate potential profits.

• Misconception 3: All Stocks Participate Equally

Reality: The Santa Rally pattern is observed in broad market indices. Individual stocks may behave differently based on company-specific factors, sector dynamics, and other considerations.

• Misconception 4: The Pattern Is Due to "Holiday Cheer"

Reality: Whilst sentiment may play a role, the pattern is more likely driven by technical factors such as low trading volumes, year-end portfolio adjustments, and the completion of tax-loss harvesting.

Conclusion: Understanding the Santa Rally in Context

The Santa Rally represents one of the most well-documented seasonal patterns in financial markets. Since Yale Hirsch first identified this phenomenon in 1972, the tendency for markets to rise during the final week of December and the first trading days of January has been observed approximately 79% of the time, with an average gain of 1.3% during this period.

However, as the 2024 experience demonstrated, seasonal patterns are historical tendencies, not guarantees. Market conditions, economic factors, valuations, and investor sentiment all play crucial roles in determining whether any given year will conform to historical norms.

For traders and investors, the Santa Rally should be viewed as one consideration amongst many when making investment decisions. Robust risk management, thorough analysis of current market conditions, and realistic expectations about potential returns remain essential regardless of seasonal patterns.

As we approach the 2025 holiday season, market participants will once again watch to see whether Santa delivers gains to equity markets. By understanding the historical context, underlying mechanisms, and limitations of this seasonal pattern, investors can make more informed decisions about how, or whether, to position portfolios around this time of year.

*Past performance does not reflect future results. The above are only projections and should not be taken as investment advice.