It is less than a week before Christmas and everything, literally everything turns red around us. From coffee shops, malls, post offices and… our credit card balance, of course. But there is one exception: Wall Street top stock indexes.
Top equity indexes, not only in the United States, tend to enjoy a last final bullish impulse before Christmas and New Year holidays reduce trading volumes as most investors go offline. That last breath of optimism is usually called “the Santa Claus rally”.
According to experts, the Santa Claus rally is a phenomenon caused by a combination of factors, from just a cheerful mood among market participants to tax calendar matters.
Does it make any sense? Of course it does. Just take a minute to think about it. Most office workers receive their Christmas bonuses on December, leaving more cash into their pockets and ultimately making them feel more happy (who said money doesn’t buy happiness?)
Following this line of thought, people with more money has three simple options: save it, invest it or spend it. Let’s go point by point:
Save it: are you nuts? Come on… it’s Christmas! Seriously not an option.
Invest it: everybody is going out of the market, pushing activity down, not the best time to enter.
Spend it: oh yeah… now we are talking! Of course, this is the only real option to consider.
And as millions start using their bonuses here and there, retail sales jump, pushing their stocks and optimism higher, and yes, driving the Santa Claus rally.
So… will there be a Santa Claus rally in 2017?
In this particular year, the Santa Claus rally seems to be covered up by the Tax Reform rally, which could turn into a dangerous “buy the rumor, sell the fact” event and turn out to be a bearish catalyst for US markets.