The Holiday Investing Season - What You Need to Know About Investing During the Holidays

During my futile attempt at trying to get an early start to my holiday shopping it got me thinking about how important the holiday shopping season is for the economy, what it tells us about the consumer, and the potential investment opportunities.

While the holiday shopping season corresponds to shopping, holiday parties and festivities, it can also be a good time for financial advisors to locate good investment opportunities for their client's investment portfolios. It also includes investment strategies like investment opportunities and the famed Santa Claus Rally.

The Santa Clause Rally, which is a term used to describe the tendency of the stock market to produce 1% to 2% returns between the first trading session following the Christmas holiday and the first two trading sessions of the New Year. The term was coined by Yale Hirsch in the 1972 version of The Stock Trader’s Almanac. According to Hirsch and the Stock Trader’s Almanac, the S&P 500 index advanced 79.2% of the time between 1950 and 2022 and a Santa Claus Rally happened 58 times. The S&P 500 index also posted an average 1.3% return during these trading sessions. Table one (Source: Zephyr) shows the solid investment performance during these five trading days over the past 10-years.

While the calendar anomaly may be just that, an anomaly, the Santa Clause Rally unfolds as follows.

• Holiday Bonuses – We all remember Clark Griswold using his expected Christmas bonus to install a backyard pool. While most people aren’t receiving a pool sized bonus, some will receive extra spending money or additional money to invest.
• Tax Management Strategies – One of the most popular tax management strategies is tax-loss harvesting which involves investors realizing their investment losses by selling their losers and re-allocating the proceeds.
• Lower Trading Volume - Some traders and institutions take a break from their computers and sit in front of a warm fire sipping on holiday cheer, which reduces volume. This makes it easier for market bulls to spread their joyous sentiment.
• New Year’s Sentiment – Investing is behavioral, and many investors are cheerful and optimistic during the holidays, which tends to mean good things for equity prices.

Will we experience a Santa Clause Rally this year?

This year is not a typical year due to the re-election of President Trump and the Federal Reserve (Fed) is in the early stages of its rate cutting cycle. Equities tend to perform well during election years and during the initial stages of a rate cutting cycle. Additionally, the consumer remains in a good spot and will continue to spend, which bodes well for retail stocks and a Santa Clause Rally.

The Importance of the Holiday Shopping Season

While the traditional Santa Clause Rally is a fun talking point, extending that period to the first trading session following Thanksgiving to the first two sessions after the New Year is much more important for retailers and the economy. The holiday shopping season should be watched closely, as it’s a good barometer for the economy and stocks.

The holiday shopping season is a good indicator of the consumer’s sentiment towards the economy and their willingness to spend, which is vital for the health of the U.S. economy. Consumer spending made up almost 68% of U.S. GDP during the second quarter of 2024 while the long-term average is 64%. Furthermore, according to the National Retail Federation, on average, sales during the November and December holiday shopping season account for 19% of total annual retail sales over the past five years.

Investment Opportunities During Holiday Shopping Season

Tracking the performance of equity sectors is a key indicator of how the important holiday shopping season is fairing and whether the consumer sentiment is cheerful or dreadful. Not only is the holiday shopping period a good time to find some bargain prices for consumers, but it also provides some investment opportunities. While November tends to be the best month for equity performance, December and January also rank amongst the best. (Table 2 - Source: Zephyr).

In addition to sector performance being a good barometer for the holiday shopping season, one should consider specific industries that benefit from a busy and cheerful holiday season. Some industries include retail, transportation and food & beverage when trying to locate investment opportunities during the holidays (Table 3: Source - Zephyr).

While the holiday season is a joyous time filled with laughter, fun, indulging, holiday parties and it is a good time to talk about the famed “Santa Claus Rally”. This time should not be isolated to holiday festivities. It also provides a good time for financial advisors to gobble up some good investment opportunities for their clients and is a great indicator of economic health and consumer sentiment.

Note: Performance data is sourced from Zephyr. Reach us at Zephyrinfo@Informa.com to run similar analytics and create custom charts in Zephyr.