What is a Santa Rally and which stocks could enjoy a Christmas charge-up this year?

What is a Santa Rally?

A Santa Rally is stock market phenomenon where equities across developed markets see a short-term positive effect around Christmas. Many analysts think that a rise qualifies as a Santa Rally if it gets going in the week before Christmas, with the effect ending around the start of January.

There are several theories around why a rally sometimes happens: some argue the general feeling of seasonal optimism is key, while others think it’s the combined effect of holiday bonuses hitting the stock market alongside end-of-year tax considerations.

It’s also worth noting that many institutions reduce trading during the holidays, leaving retail investors with comparatively more influence. Beyond this, several trading days are shortened around Christmas, creating heightened liquidity and making it easier to see sharp movements.

How to trade or invest during a Santa Rally with us

You can start investing in the hoped-for Santa Rally using the following steps:

1. Create your live account in minutes
2. Select your IG ISA or Share Dealing Account
3. Research your Santa Rally opportunity, and consider how to diversify your portfolio and how to manage risk
4. Invest a lump sum or set up a regular instalment to fund your account
5. Monitor your position

New to investing? Open a demo account to build your confidence.

Please be aware that not all stocks qualify for ISA inclusion. We offer zero commission on US shares, and just £3 on UK shares, with a foreign exchange fee of just 0.5%.

While there is evidence this is a real phenomenon, there has been limited analysis of the effect. Past performance is not an indicator of future returns, and risk management tools like stop losses may be in order.

We also offer CFD and spread bet trading, which comes with elevated risk. This involves trading on leverage, which can mean higher returns but also exacerbates losses.

Is a Santa Rally a real phenomenon?

There are various calendar curiosities to consider when investing and trading — for example, ‘sell in May and go away’ — or in other words, selling out of the markets during the summer. Then there’s the ‘October effect,’ where traders think the markets tend to sell-off during the month. Or even the ‘January Barometer,’ a theory that returns in January sets the tone for the market for the next 11 months.

There is some evidence for these effects, but it’s perhaps key to recognise the psychology behind them. Arguably, a large part of the effect is the belief in the effect; investors believe a Santa Rally will happen, so invest more to benefit, thus creating the rally in a positive feedback loop that draws in more investors each year.

But whether this is the case or not, there is decent evidence that the effect is real — even though the performance of years past does not guarantee this year’s.

The term was first coined back in 1972 by Yale Hirsch, the founder of the Stock Trader’s Almanac, who defined the rally as being the final five days of the trading year and the first two days of the following year — though the timeframe is less defined nowadays.

These seven days have delivered a positive return on the S&P 500 around 80% of the time, since its inception through to 2022 — or 58 of those 73 years — with an average growth rate of 1.4%.

It’s worth noting that in the week leading up to Christmas Day, there appears to be no evidence for or against a positive effect, though some analysts think that value stocks outperform growth stocks in this week.

In the month of December as a whole though, the FTSE 100 has returned an average of circa 2.3% since its inception in 1984 — and enjoyed a Santa Rally 24 times between 1994 and 2023. Further, it has only had a negative month six times in this period. Interestingly, even in the 2008 Global Financial Crisis, the FTSE enjoyed a Santa Rally, and again during the pandemic in 2020 and 2021.

As you might expect, a Santa Rally tends to impact sectors subject to sentiment and consumer spending. Retail and consumer discretionary stocks with exposure to holiday shopping can outperform, especially in a strong economy.

Technology sector companies can also stand to benefit, as Christmas can be a time where digital payments and e-commerce records are broken. Specific financial sector companies also benefit, with brokers and investment banks enjoying increased retail investor fees.

Pros and cons of investing in and trading a Santa Rally

As ever, there are advantages and drawbacks to every strategy:

Pros of a Santa Rally

• Profit — historically, there is good evidence for positive returns in large cap US and UK stocks during the period. A Santa Rally may be a good opportunity, especially for traders
• Volume — with many institutional investors away, volumes are lower and this can give retail investors more control over the market
• Optimism — Christmas time is a generally positive time of the year, and this can create a buying environment, especially when bonuses are being handed out

Cons of a Santa Rally

• Volatility — low volumes can be a double-edged sword, as swift rises can be followed by dramatic falls. This is perhaps a risky environment for inexperienced investors and traders
• Uncertainty — while there is a clear historical trend, this does not mean that the markets will go up this year. This is an observed phenomenon, not a guarantee
• Risks — traders looking to generate a fast profit may be caught out if there’s a correction
• Fundamentals — long-term investors are unlikely to see much benefit from a Santa Rally given how short the timespan is

Five best Santa Rally stocks to watch for Christmas 2024

These stocks have been chosen for their relative importance around the holiday season.

1. Coca-Cola
2. Marks & Spencer
3. Diageo
4. Games Workshop
5. Halfords

Coca-Cola (NYSE: KO)

You almost can’t think of Christmas without Coca-Cola. Indeed, the company played a significant role in shaping the modern image of Father Christmas as a red-suited, jolly figure — hiring artist Haddon Sundblom who helped popularise the iconic red suit and white beard.

Coca-Cola owns the rights to dozens of soft drink brands all over the world, and non-GAPP organic revenues rose by 9% year-over-year to $11.9 billion in Q3 2024.

Chairman and CEO James Quincey enthuses ‘Our business continues to demonstrate resilience in the face of a dynamic external environment. We are encouraged by our year-to-date performance and our system’s ability to manage near-term challenges while also remaining focused on long-term growth opportunities.’

Marks & Spencer (LON: MKS)

Marks & Spencer is arguably synonymous with Christmas luxury. ‘This isn’t just a Christmas Cake…,’ it’s a fantastically effective advertising campaign.

The company has gone from strength to strength over the past couple of years under CEO Stuart Machin, with the share price quadrupling since Q3 2022.

In half-year results, profit before tax and adjusting items rose by 17.2% year-over-year to £407.8 million, with food sales a highlight, increasing by some 8.1% in the year.

Machin noted that ‘Executing our strategy to ‘Reshape M&S for Growth’ has again delivered an increase in customers, sales value and volume, market share, profit and returns. Both Food and Clothing have now delivered market share growth for four consecutive years. Central to our strategy is our vision to be the most trusted retailer, with quality products at the heart of everything we do.’

Diageo (LON: DGE)

Diageo owns many iconic alcohol brands — including Johnnie Walker, Guiness, Tanqueray, Baileys and Smirnoff — which it sells all over the world.

In marked contrast to Marks & Spencer, the beverage company has suffered a poor couple of years — driven by profit warnings, a sales slump in Latin America and the Caribbean, and widely reported inventory problems. But UBS recently lifted its target from a ‘sell’ to a ‘buy’, with a price target of 2,920p.

In full-year results, net sales were $20.3 billion, with operating profit up some 8.2% year-over-year. CEO Debra Crew advised that ‘While fiscal 24 was a challenging year for both our industry and Diageo with continued macroeconomic and geopolitical volatility, we focused on taking the actions needed to ensure Diageo is well-positioned for growth as the consumer environment improves.’

Games Workshop (LON: GAW)

Games Workshop has been one of the most famous London success stories in recent years, and the manufacturer of miniature wargames, based in Nottingham, continues to set fresh records. Its products are undeniably luxuries, but demand in the Christmas season may perhaps rise for present-giving reasons.

In a recent trading update, Games Workshop advised that ‘trading since the last update on 18 September 2024 is ahead of expectations. The Board’s estimate of the results for the six months to 1 December 2024, at actual rates, is core revenue of not less than £260 million (2023/24: £235.6 million) and licensing revenue of not less than £30 million (2023/24: £13.0 million). The Group’s profit before tax (“PBT”) is estimated to be not less than £120 million (2023/24: £96.1 million).’

Halfords (LON: HFD)

Halfords shares have been falling over the past two to three years, but the retailer carries a special place in the UK’s heart as the bicycle retailer of choice. And if there’s one classic gift, it’s a new bike.

In recent interim results, free cash inflow increased to £28.1 million, driving underlying profit before tax to a ‘broadly flat’ £21 million. The company may be turning its prospects around, with inventory down by £18.8 million year-over-year and an interim dividend of 3p declared.

CEO Graham Stapleton noted ‘I am really pleased with the progress we have delivered in the first half. Against ongoing headwinds, we have continued to focus on controlling the controllables, with a disciplined approach to cost and margin optimisation.’

Santa Rally summed up

• A Santa Rally is stock market phenomenon where equities across developed markets see a short-term positive effect around Christmas
• The rally is generally defined as the final five days of the trading year and the first two days of the following year, though the timeframe is less defined nowadays
• A Santa Rally tends to impact sectors subject to sentiment and consumer spending, including retail and consumer discretionary stocks
• While there is a clear historical trend, this does not mean that the markets will go up this year. This is an observed phenomenon, not a guarantee