Will 2021 See a Santa Rally or a Grinch Collapse?

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Will 2021 See a Santa Rally or a Grinch Collapse?

December effect, January effect, Santa rally and dart-throwing monkeys

Back in 1972, Yale Hirsch of the Stock Trader’s Almanac proposed the existence of the Santa Rally – and it’s been a constant source of eggnog-fueled debate for decades.

The Santa Rally refers to the general tendency of the U.S. equity markets to post gains in trading days between Christmas and the first two days after New Year’s.

The Stock Trader’s Almanac found that since 1950, the average movement in the S&P 500 Index during this period of seven trading days has been a gain of approximately 1.4%.

But is the Santa Rally really because it happens to fall in the month of December – which has historically been one of the best months for the equity markets? Let’s examine.

The December Effect

Since 1950, we have had a lot of Decembers. Did you know that 53 of those Decembers brought positive gains for investors while 18 produced negative returns – with an average return of 1.5%?

The Grinch Collapse in 2021?

More than two-thirds of the way through the month of December this year and the major U.S. equity markets are barreling towards some not-so-good December performance. But it’s not even close to history-making-poor-performance – at least not yet.

And if reviewing poor-performance-Decembers through a historical lens makes you feel better, consider this:

• For the month of December in 1931, stocks were hammered and the S&P 500 suffered losses of 14.5% (note that the S&P 500 first came to be in 1950, but it was back-tested through 1928)

• The narrowly-defined DJIA also had its worst December performance in 1931 when it lost a whopping 17.0%

The January Effect Will Help, Right?

Oh, and in case you’re thinking that the January Effect is more important than the December Effect, did you know that since 1950, we have seen 42 positive Januarys and 29 negative ones, with an average return of 0.80%?

In other words, December has historically been a better month when compared to January. Interesting.

The Monkey Effect

If you incorporate the Santa Rally, the December Effect, the January Effect or the made-up Grinch Collapse into your investment theory, then you may as well hire a monkey to pick your investments.

Because in 1973, Princeton University Professor Burton Malkiel claimed in his best-selling book, A Random Walk Down Wall Street, that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”

And according to a publication from Research Affiliates, with 100 monkeys throwing darts at the stock pages in a newspaper, the average monkey outperformed the index by an average of 1.7% per year since 1964.

Find a Santa Monkey?

Makes one wonder what would happen if you dressed up a fat monkey in a Santa suit and asked the Santa Monkey to pick investments during those trading days between Christmas and the first two days after New Year’s. But if you can’t find a Santa Monkey, talk to your financial advisor.