Status: 12/15/2022 07:55 a.m
The Christmas rally on the stock exchange is not a myth, but statistically well documented. But what are the chances of course gifts under the Christmas tree this year?
It’s the classic seasonal pattern on the stock market: the Christmas rally. Every year, after a short phase of weakness at the beginning of December, the stock market attracts investors with above-average profits towards the end of the year. To justify this, stock market experts often refer to what is known as “window dressing”: fund managers want to beautify their balance sheet towards the end of the year and buy shares that have previously performed well.
Dimitri Speck, founder and chief analyst at Seasonax, also cites emotional reasons: “The mood around Christmas tends to be festive.” Thanks to the gifts for the festival, most people are in a buying mood – this also applies to shares.
High probability of price gains at the end of the year
Experts do not quite agree on exactly when this popular stock market phenomenon will start. According to a common definition, the Christmas rally begins in mid-December and lasts until early January.
“Among the seasonal patterns for the entire stock market, it is one of the most profitable. Its good reputation is therefore justified,” emphasizes Seasonax expert Speck. The probability of a positive movement at the end of the year is very high.
“A real Christmas present” for investors
The Christmas rally is – because of the longer stock market history – statistically well documented, especially for the US stock indices Dow Jones Industrial Average and S&P 500. In the past 125 years, the seasonal phase between December 14 and January 3 was positive for the Dow Jones 88 times, Speck explains.
The average increase was 1.5 percent. “The Christmas rally achieved more than a quarter of the total profit for the year in just twelve trading days – a real Christmas present!”
But even the leading German index DAX cannot escape the phenomenon of the Christmas rally – on the contrary: “In the past, the domestic stock exchange barometer was able to increase by an average of 2.5 percent in about 71 percent of cases and put price gifts under the Christmas tree for investors,” explains IG analyst Christian Henke.
Seven trading days that have it all
The Christmas rally in the narrower sense, as described in the renowned Stock Trader’s Almanac – the “Bible” for seasonal stock market phenomena – as the “Santa Claus Rally”, lasts only seven days. It includes the last five trading days of the old year and the first two trading days of the new year.
Based on this definition, the most recent Christmas rally was also a complete success: Despite the increased uncertainty on the stock markets at the beginning of the year, the broad S&P 500 ended the seven-day trading range with a gain of 1.4 percent. This even exceeded the average value of 1.3 percent for the past 50 years.
A lot of positive things are already included in the courses
But despite all the enthusiasm for the statistics, the interesting question for investors is: What are the chances of a Christmas rally this year? The answer to this question is much more difficult for market observers. The fact is: a lot has already been anticipated on the stock markets recently. A lot of positive things are already priced into the prices.
For example, the report that the German economy got off lightly despite the energy crisis and is only likely to experience a mild recession in the winter half-year is no longer big news on the stock market. The prospect of further falling inflation rates is also simply a market consensus.
Monetary policy also increasingly lacks the potential for positive surprises. The fact that the central banks will reduce their rate of interest rates had already boosted prices on the stock markets on both sides of the Atlantic in the run-up to the meetings of the Federal Reserve and the European Central Bank this week.
Fed and ECB in the focus of investors
It is quite possible that with the interest rate decisions yesterday and today, disillusionment will set in on the markets in the form of a “fait accompli” effect.
If Fed Chairman Jerome Powell and ECB President Christine Lagarde do not argue extremely dovishly at the press conferences after the central bank meetings – which is hardly to be expected – the positive surprise effect that is needed to continue driving prices would be eliminated.
Christmas rally is subject to change
From a technical perspective, the starting position in the DAX is good in view of the recent price gains. On Tuesday, however, the German stock market barometer failed to regain the high of December 1 (14,608 points) at the daily closing price. “However, this hurdle should be overcome in order to head for the high of 14,712 points from the beginning of June and then the lower limit of the often-mentioned trading range at 14,800 points,” emphasizes IG analyst Henke.
Conclusion: The ground for a Christmas rally appears to be prepared on the stock exchanges this year as well. But fresh positive impulses are needed so that investors can once again hope for price gifts under the Christmas tree.