Good morning,
Happy Holidays, everyone!
The dominant theme of the final two weeks of the year is vacation—and that matters for markets. It helps explain why Santa Claus rallies recur often enough to be more than folklore. None of these forces are guarantees, but together they form a credible structural and behavioral framework.
Structural Market Drivers
- Institutional Rebalancing & Cash Deployment
Year-end inflows from bonuses, retirement plan contributions, and the reinvestment of capital-gain distributions (especially in strong market years) create steady, price-insensitive demand. - Tax-Loss Selling Exhaustion
Tax-loss harvesting typically peaks by mid-December, reducing selling pressure and improving the supply-demand backdrop. - Thin Liquidity Amplifies Moves
With traders, portfolio managers, and risk committees on holiday schedules, modest flows can move prices more than usual. - Performance Window Dressing
Particularly in years when market leadership has been narrow, managers lagging benchmarks are incentivized to add exposure to visible winners and reduce cash.
Behavioral Reinforcement
- Lower Risk Aversion
By late December, major macro risks—Fed meetings, earnings seasons, elections—are largely behind the market, allowing for a brief compression of uncertainty. - Positive Feedback Loop
The Santa rally is widely known. Investors anticipate it, position for it, and in doing so, often help bring it about. - Sentiment and Career Risk
Few managers want to explain why they missed a year-end rally; participation frequently feels safer than caution.
Historically, the last five trading days of December and the first two of January have delivered above-average returns with higher hit rates than random periods. That said, the magnitude varies widely—and the pattern fails outright in high-stress macro environments (2000, 2008, 2018, 2022).
The most reliable Santa-cancelling force is tightening liquidity: hawkish Fed surprises, credit stress, forced deleveraging, or sharp valuation resets. While some of those risks still lurk beneath the surface, their absence—for now—improves the odds of a Santa Rally again this year.
Have a great week. I’ll be back next Monday with a look at the Outlook for 2026, drawing on perspectives from several independent research organizations.
Be well,
Mike