In my futile attempt to get an early start on my holiday shopping, I thought about how important the holiday shopping season is to the economy, what it tells us about the consumer and potential investment opportunities.
While the holiday season corresponds with shopping, holidays and festivities, it can also be a good time for financial advisors to find investment opportunities for their clients. This includes the famous Santa Claus rally.
The Santa Claus rally is a term used to describe the tendency of the stock market to produce returns of 1% to 2% between the first trading session after 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 The Stock Trader's Almanac, which stated that the S&P 500 index advanced 79.2% of the time between 1950 and 2022 and a Santa Claus Rally occurred 58 times. The S&P 500 index also posted an average return of 1.3% during these trading sessions. Table 1 shows the solid performance during these five trading days over the past 10 years.
While the calendar anomaly may be just that, the Santa Claus 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 getting a pool size bonus, some will get extra money or extra 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 reallocating income.
- Lowest trading volume—Some merchants and establishments take a break from their computers and sit in front of a warm fire happily drinking in the holiday cheer, which turns the volume down. This makes it easier for market bulls to spread their euphoric sentiment.
- New Year feeling—Investing is behavioral and many investors are happy and optimistic during the holidays, which tends to be good for stock prices.
Will we experience a Santa Clause rally this year?
This year is not a typical year due to the re-election of President Donald Trump and the Federal Reserve is in the early stages of its rate-cutting cycle. Stocks tend to perform well during election years and during the early stages of a rate-cutting cycle. Additionally, the consumer remains in a good place and will continue to spend, which bodes well for retail stocks and a Santa Claus Rally.
The importance of the holiday shopping season
While the traditional Santa Claus Rally is a fun talking point, extending this period from the first trading session after Thanksgiving to the first two sessions after the new year is much more important to 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 consumer sentiment toward the economy and their willingness to spend, which is vital to the health of the US economy. Consumer spending accounted for almost 68% of US GDP during the second quarter of 2024, while the long-term average is 64%. Additionally, 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 opportunity during the holiday shopping season
Tracking the performance of equity sectors is a key indicator of how the important holiday shopping season is going and whether consumer sentiment is upbeat or downbeat. Not only is the holiday shopping season a great time to find bargains for consumers, it also offers some investment opportunities. While November tends to be the best month for equity performance, December and January also rank among the best. (Table 2).
In addition to sector performance being a good barometer for the holiday shopping season, there are specific industries to consider that benefit from a busy and joyous holiday season. Some industries include retail, transportation, and food and beverage when trying to find investment opportunities during the holidays (Table 3).