Investing in the stock market has many myths and fairy tales according to which you can earn money just doing something very simple. Could we include Santa Claus Rally and January Effect into them?
Let’s see what they are about.
Santa Claus Rally
Santa Claus Rally refers to a typical increase in a stock’s price during December and especially during the last week of it. The explanations are very varied.
Some say that this is due to something as simple as people are generally happy during Christmas. Others say that professional traders go on holidays, and amateurs are generally more optimistic. Some even say that people invest their Christmas bonuses in the stock market.
Now, if we look what happened with EuroStoxx 50, it does not seem very reliable. In the last 11 years we have 5 positive Decembers and 6 negative ones. However, all these theories are usually born in the U.S. What happened there? Well, the S&P 500 had four negatives and seven positives.
Although it is true that historically the stocks increase during this period of time, if you ask us, it does not seem that the Santa Claus Rally has a big effect, especially if we take into account that, in general, the markets are more often increasing than going down.
January Effect
The theories that support the January Effect are not so different than the ones mentioned above. People still have their Christmas bonuses to invest and the optimistic sense from the Holidays.
Also, January is a time that psychologically makes people aware of what they need to start doing, and saving along with going to the gym are the most popular resolutions.
In the last 11 years, EuroStoxx 50 had seven positive Januaries and four negative ones, and S&P 500 had the same results. According to Investopedia, from 1928 to 2018, the S&P 500 rose 62 percent of the time.
However, experts are saying that the January Effect is not working so well lately as you have seen in the last 11 years we told you about. The reason is because the market has learned about it and has adapted.
Conclusion
If you are a buy-and-hold investor, it does not seem that the Santa Claus Rally or January Effect are going to be very useful to you. If you invest more like a trader with shorter time frames, it may be just another factor to add to your decision-making system.
As we always say, there is no such thing as easy money, but all the information you have will make you a better investor.
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