We wrote last week that volumes are subdued around this time of year which means positioning and flows dominate as news flow and economic data releases are thin. That said, hopes for a traditional December-end rally in stocks did kick off as the benchmark S&P 500 and Dow have subsequently hit fresh record highs amid strength in technology and energy offset caution tied to robust growth data.
The Santa rally is a once a year tendency for stocks to climb in the last five trading days of the year, and first two days of the new one. History tells that since the 1950s, this single seven-day period has produced a positive return for the S&P 500 78.9% of the time. No other similar duration of trading sessions is more likely to be higher. Indeed, according to the Stock Trader’s Almanac, November is the start of the best six-month period for US stocks. It has been the best month for the S&P 500 and second best for the Dow Jones Industrial Average since 1950, while it has been the second best month for the tech-heavy Nasdaq Composite Index since 1971.
The so-called ‘January Effect’ has been a key driver for stocks in the past; that is when traders eagerly buy stocks in December, envisioning a January rally. This behaviour is grounded in the belief that stocks, especially the smaller ones, tend to put on a show at the start of the new year. The festive season between Christmas and New Year often brings a wave of optimism which leads many to buy more stocks with their year-end bonuses, hoping for future gains. In addition, big players like institutional investors and large funds often have to execute year-end portfolio rebalancing, as the calendar flips.
On the other side, if Santa fails to ‘call’ in with a rally when he is supposed to, the broad-based S&P 500 has lost 1% on average in the first quarter compared to an average 2.6% gain following a normal Santa Rally. We note the last two years saw no Santa Rallies, and subsequent -3% and -4% drops in the market.
Finally, we have to mention gold and silver, which have made fresh highs with the latter move especially notable, indeed quite incredible. It enjoyed its biggest one-day (+10.3%) and one-week (+18%) dollar gain on record and is now up for eight straight months. Amid the many reasons, key has been China’s shift to require government licenses for all silver exports from January 1st, 2026. This replaces the old quote system and threatens to limit outflows from the world’s top refiner. With price action parabolic, volatility risks are exceptionally high.