Father Christmas, Saint Nicholas and Santa Claus, all names we associate with modern Christmas celebrations. Yet there’s one name that, for economists, is possibly the most important at this time of season: Yale Hirsch.

While you won’t find Mr Hirsch mentioned at your Christmas party, or his face appearing behind the days of your advent calendar, he’s important for those watching the markets. Because, back in 1972, he coined the now omnipotent term ‘Santa Claus Rally’.

Hirsch’s research went on to define the timeframe of the final five trading days of the year, and the first two trading days of the new year, as the dates when markets tend to outperform. The term has since widened to effectively cover the period we start opening our advent calendars.

You can’t fault the logic. According to The Wall Street Journal, historically the broad large cap US index and the tech heavy Nasdaq have risen around 80% during the Santa Rally period, with average returns of 1.3% and 1.8%, respectively.

Hirsch was an established investor and academic, but he also had a penchant for a verse, with one of his most famous rhymes also used by investors as an early indicator of what may happen in the New Year: “If Santa Claus should fail to call, bears may come to Broad and Wall (Street).”

According to studies going all the way back to the mid-1900s, there have only been six times when Santa Claus has failed to show up in December. Of these, January was lower five times, only once did the full year have a solid gain on US markets.

Always heed the red warning signs

The basis of a pattern is plain for all investors to see. But just what is the cause of the phenomenon? While there’s no broadly accepted reason for markets to outperform in the run-up to Christmas, a few reasons have been cited. One could be that more institutional investors, who usually operate with a longer-term mind set, tend to be on holiday for the final weeks of December. This results in retail investors, who tend to be more bullish, having more of a say in market movements.

However, during a period synonymous with the man in red, there is of course a clause. While it does make for an interesting and satisfying anecdote for investors, the Santa Rally is by no means guaranteed. Effectively investors will take on extra, unwarranted inherent risk in relying solely on a seasonal anomaly or calendar event to base their decisions on.

Essentially, don’t confuse correlation for causality. Just because the markets do tend to perform well in December, that doesn't mean they will continue to do so. Each year brings with it a different set of circumstances affecting market sentiment, such as during 2018, when markets struggled in the face of rising bond yields, nursing decent losses.

As they say, past performance is no indicator of future returns and although there’s data to support the Santa Rally thesis, relying on it could mean investors’ portfolios end up much like the aforementioned advent calendar, with its days numbered.

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The views expressed in this blog should not be regarded as financial advice.