Is the Dow Due for a Santa Claus Rally?

As the stock market takes its annual Thanksgiving pause, investors have to be concerned about the volatility that stocks have shown during November. Yet despite the ever-present fears about the fiscal cliff looming on the horizon, bulls point to the phenomenon of a Santa Claus rally as a reason to be optimistic about the markets.

Before you put your money to work counting on any seasonal indicator, it pays to look back at least a few years to see if it's worked in the past. With that in mind, let's take a look at how the Dow Jones Industrials (^DJI -0.11%) have performed during the last part of the past several years to discover if the Santa Claus rallies have materialized.

Too early? Never.
First, though, it's important to address one possible objection to this analysis: that it's too early to judge market action to be part of a Santa Claus rally. Yet although many define a Santa Claus rally narrowly to include only the week between Christmas and New Year's Day, the predictability of seasonal indicators makes it easy for astute investors to try to jump the gun on their peers, making the phenomenon appear earlier. Just as the holiday shopping season has moved inexorably past Thanksgiving toward the beginning of November, so too is it reasonable to expect a Santa Claus rally to break out of its December bounds.

So without further ado, here are the numbers for the past five years:

Source: Yahoo! Finance.

All told, banking on the late-year seasonal effect would have produced a total return of almost 17%. That's not bad for being in the market for just over six months.

Perhaps the most shocking thing about the results is how they gloss over the financial crisis. During 2008, when the Dow fell a whopping 34%, the Santa Claus rally period produced a minor gain for the Dow. Meanwhile, the following year, when the Dow recovered 19%, it actually gave back a portion of those gains during the last part of the year.

Stocks for a rally
The commonly held rationales for the Santa Claus rally are more broad-based and less focused on individual stocks. With explanations ranging from holiday bonuses getting invested into the market to trying to get a jump on the seasonal January effect, the factors supporting the rally affect the whole market. To the extent that tax considerations play a role, some stocks may be more susceptible to move than others.

But looking at Dow stocks, it's hard to pick up any pattern. Last year, for instance, half a dozen stocks picked up 15% or more, with General Electric (GE -2.11%) leading the way after a dividend increase that brought its yield to 4% and showed that the company was well on the path to a full recovery. Similarly, Boeing (BA -2.87%) climbed substantially on what turned out to be correct predictions that its commercial aircraft business would prosper in 2012.

The previous year, GE was also among the top gainers. Yet Alcoa (AA) also showed up among the top Santa Claus ralliers in 2010, despite having the worst performance of any Dow stock during the 2011 period. The end of 2010 was a big winner for materials stocks generally, as investors looked for signs that the economic recovery would finally start to take firmer hold. Alcoa had also done extremely well at the end of 2009, rising 24% from late November to the end of the year.

Yet looking back to 2007, no Dow stock gained more than 10%. The rally instead was fairly broad-based, with AT&T (T 1.88%) leading the way with a 9% jump to close out a prosperous year, as the early adopters of what would become the smartphone revolution pointed the way to a promising future for the wireless network provider.

Rally on
The evidence is far from clear on whether you can expect a Santa Claus rally. But investing in companies whose businesses are showing signs of strength generally makes sense regardless of whether seasonal factors give you an extra boost.