It’s been a pretty wild year — actually, it’s been a crazy last few years. Canadian investors and those around the world are looking for opportunities and scared to take them as well, which is usually what happens each year during the Santa Claus Rally.
What is the Santa Claus Rally?
So, what is the Santa Claus rally? This rally is a phenomenon that seems to happen most years between the Christmas holiday on Dec. 25 through the New Year until around Jan. 2. This rally tends to start in the week leading up to the Christmas holiday, while other times, it may not start until Christmas day.
This tendency to increase isn’t due to an official capacity; indeed, it’s not a certainty. However, there are a few theories as to why it takes place most years. For instance, some believe there is optimism as the year comes to an end and a new year arrives. Others believe it’s merely from Wall Street taking a vacation, leaving institutional investors out and the market in the hands of retail investors.
Others believe it could simply be end-of-year tax considerations that have put investors into investing. For instance, if you haven’t invested in your Registered Educational Savings Plan (RESP) with its Dec. 31 deadline, you would miss out on a grant.
Does it always happen?
In short, no. There is absolutely no guarantee that a Santa Claus Rally will happen. But if there is a general feeling of optimism heading towards the holidays on the markets, the chances do seem to be greater. It was first noticed in 1972, defined as the final five trading days of the year and the first two trading days of the next year. At the time, those seven days saw higher stock prices 79.2% of the time on the S&P 500.
From 1950 to 2020, it was noted that the Santa Claus Rally occurred 57 times on the S&P 500. However, that isn’t every year. For instance, on the TSX, in 2020, stocks spiked in the new year, and there was a major boost during the 2021 rally. There was a mild rally that again only picked up in the new year of 2022. So, the last few years are certainly not an indicator of success.
However, something else might be.
A bull market?
If we’re headed towards a bull market, that could be an indicator that optimism will fuel a Santa Claus Rally. In fact, November has seen a massive rally in 2023, marking the best, solid performance on the TSX and other markets. This comes as inflation and interest rates finally get under control, leading to investors getting back in the market.
Therefore, if we get to a Santa Claus Rally, this year looks as likely as ever, with far more uncertainty about the economic future. And if that happens, I would certainly consider investing back into bank stocks. Canadian banks are due to rise once more from Canadians seeking out loans, and they tend to bounce back quickly after downturns from provisions for loan losses.
Among them all, Bank of Montreal (TSX:BMO) looks like a great deal. Shares are still down by 16% in the last year, though it’s seen a fair bit of growth in the last month. It now trades at just 10.7 times earnings, offering a 5.36% dividend yield as well. That’s one you’ll want to scoop up as it recovers. And it should blast higher thanks to expansion through Bank of the West in the United States. Overall, it’s a great investment that could bring in superior returns in the next year, even during the Santa Claus Rally.
