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Do family visits, gifts and personal resolutions around the year-end holidays inject a dose of optimistic forward thinking into U.S. stock investors? To investigate, we analyze the historical returns of the S&P 500 index from one trading day before through 10 trading days after Christmas. Using daily closing levels for 1950-2006 (57 events), we find that...
The following chart shows the average daily S&P 500 index returns from one trading day before (X-1) through 10 trading days after (X+1 to X+10) Christmas for 1950-2006, with one standard deviation error bars. The mean daily return for all trading days in the sample is 0.03%. Results on average suggest abnormal strength just before and for a little more than a week after Christmas (just past New Year's Day). Then weakness sets in. Volatility on average tends to be low just before and after Christmas, but rises to a higher than normal level around the turn of the year. As usual for daily data, noise generally dominates signal.
To check the stability of the pattern, we next look at a "modern" subsample.
The next chart compares the average daily returns from one trading day before through 10 trading days after Christmas in the entire sample to those occurring since the beginning of 1990 (17 events). This chart has no error bars and uses a finer vertical scale than the preceding chart. The two patterns are similar, but the recent subsample is somewhat less assuring of a Santa Claus rally.
The recent subsample confirms muted volatility around Christmas and elevated volatility at the turn of the year.
In summary, best guess is the U.S. stock market will show relative strength from the day before Christmas through the next six or so trading days, but noise dominates.
For related research, see Blog Synthesis: Calendar Effects and the Trading Calendar (especially the monthly profiles for December and January).
