5 Investment Moves to Make Now In Case There Is a Santa Claus Rally in 2023

shironosov / Getty Images/iStockphoto
shironosov / Getty Images/iStockphoto

‘Tis the season for Santa, and many in the stock market are waiting for an appearance from the jolly old man. Whether or not there will be a so-called Santa Claus rally this year remains to be seen, but if there is one, experts say there are some investment moves worth making to reap benefits.

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First, What is a Santa Claus Rally?

The concept of a “Santa Claus Rally” refers to a boost in stock market performance often observed in December, typically attributed to increased holiday spending, investor optimism and tax considerations, said Adam Koprucki, founder of Real World Investor.

And as Quincy Krosby, Chief Global Strategist for LPL Financial explained, the various theories behind the rally, which is approximately 1%-2%, is based on institutional portfolio managers purchasing stocks before the so-called January effect, when new money needs to be invested; the end of tax-loss harvesting; lower volume in markets during the holiday period which can help skew the market higher on positive inflows; and even a touch of the feel-good holiday spirit surrounding the lead up to the new year.

“It’s important to keep in mind that waiting for Santa to arrive can be frustrating but historically it has an approximately 75% success rate,” added Krosby.

What About This Year?

Several experts argue that conditions are ripe for such a rally to happen.

For instance, Koprucki argued that there will be a Santa Claus rally as GDP has had its most significant growth in two years, and while inflation is down significantly, it is still above the Fed’s target inflation rate, indicating the economy still has steam.

Other factors pointing to a rally, according to some experts, is that stocks have strong momentum coming into December.

“Economic data is pointing to a higher probability of a soft landing and a significant decline in bond yields is supporting higher valuations,” said Niladri Mukherjee, Chief Investment Officer, TIAA Wealth Management. “If data continues to remain firm and the Fed does not push back on easier financial conditions, then December could be another positive month for stocks.”

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What Moves Should Investors Make?

Small cap stocks

Robert R. Johnson, PhD, CFA, CAIA, professor of finance, Heider College of Business, Creighton University explained that the Santa Claus Rally is typically more pronounced in small capitalization firms. In turn, returns are generally higher during the period and that the effect is considerably stronger for small-firm portfolios relative to large capitalization portfolios.

“Investors may want to concentrate discretionary buying in small stocks,” he said, adding that discretionary buying should occur just before Christmas.

Wait to Sell

According to Johnson, the holiday period has significantly higher average daily returns in the U.S. stock markets and in many other stock markets across the world. And generally, higher returns come with higher risks.

“However our results indicate that not only is the standard deviation of returns lower during the holiday season, but skewness is often less severe,” he said. “Investors who plan to sell stocks near the end of the year would be wise to wait until after the Santa Claus rally.”

Buy Growth Stocks

These stocks, often in technology or consumer sectors, often benefit more from a year-end rally due to their cyclical nature. “People buy tech such as the latest iPhone, or iPad during the holiday season,” said Koprucki.

Profit-Taking Strategy

Koprucki added that investors might also consider selling some assets that have appreciated to realize gains. If you already hold growth stocks, you may want to consider locking in profits.

Stay Invested in Your Long-Term Asset Allocation Plans

This includes a mix of equity and fixed income and cash, said TIAA’s Mukherjee.

“However high quality bonds offer better value over equities in the medium term,” added Mukherjee.

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This article originally appeared on 5 Investment Moves to Make Now In Case There Is a Santa Claus Rally in 2023