It’s that time of year when investors’ “visions of sugarplums dancing in their heads” are accompanied by wishes of a Santa Claus Rally.
That market barometer was first coined by our old friend, Yale Hirsch (creator of the data-packed Stock Trader’s Almanac) in 1972, to denote the pattern of the short and sharp rises in stock prices during the last five trading days in December and the first two trading days in the following January (December 24, through Monday, January 5 this year).
According to the Stock Trader’s Almanac, since 1969, stocks in the S&P 500 Index have seen an average 1.3% gain during this period.
Source: Glenview Trust, Stock Trader’s Almanac, Bloomberg
As you can see from the above graph, the rally isn’t a guarantee, and in fact, it didn’t materialize in the last two years.
But hey, the possibility of a 1.3% gain over seven days is nothing to ignore, is it?
[text_ad]
5 Reasons for a Possible Santa Claus Rally
This effect has been studied by countless analysts over the past fifty years. And most investment pros agree that there are several factors that push stocks higher during these seven days, including:
- Year-end bonuses spent in the markets.
- Stock buying after investors clean up their portfolios following some tax-loss harvesting.
- The absence of many institutional traders who take year-end vacations, allowing the buying and selling of retail investors to have more of an impact on the markets.
- Seasonal optimism during the holiday season. On average, December is the third-best month for S&P 500 performance.
- Believing is seeing; if enough investors believe in the rally—and begin buying stocks—their actions can cause the markets to rise.
And this year, we may have a sixth reason for a rally due to the 2025 bull market, which has seen the S&P 500 gain 17%, a decent economy, low unemployment, and the Federal Reserve’s monetary easing.
If Santa Claus Skips the Rally…
Now, if the rally doesn’t happen, there’s another adage that often comes into play: “If Santa Claus should fail to call, bears may come to Broad and Wall.” But that did not happen after the negative moves in 2023 and 2024. Actually, that adage has proven not nearly as reliable as the Santa Claus Rally, since in the 14 years in which the S&P 500 was negative during the rally, the market was down only four times the following year.
The Largest Stocks Usually See the Most Action
If history holds true this year, it may be the biggest stocks that are the heaviest participants in the rally. Research from Strategas reports notes, “Returns for the S&P 500 year-to-date through November 2025 have seen the fourth-largest contribution from the top ten stocks since 1991 in years with positive returns.”
3 Ideas for Stocking Stuffers
So far in 2025, large-cap stocks have led the way. However, in the past month, small caps have posted some nice gains, with both small-cap growth and small-cap value stocks up more than 7% year to date. And sector-wise, Consumer Discretionary (+8.6%), Financial Services (+6.4%), and Basic Materials (+5.8%) have rallied.
Year to date, Technology stocks—dominated by AI companies—have led the pack, rising an average of 24.4%. I think we still have several years of AI stock appreciation, but it may be time to look at some other industries for year-end gains.
With that in mind, here are a few ETF ideas that you may want to consider:
- iShares Russell 2000 ETF (IWM)
- SPDR S&P 500 Financials Sector ETF (XLF)
- SPDR S&P 500 Cons Disc Sector ETF (XLY)
And lastly, here’s wishing you a happy, healthy holiday season and a prosperous new year!
[author_ad]