Christmas is over. Many Americans will soon take down their Christmas trees, mistletoe, and lights. However, Santa Claus may stick around – at least for the stock market.
I'm referring to a Santa Claus rally. With this phenomenon, stocks tend to rise during the last five trading days in December and maintain momentum at least through the first two trading days in January. We could be at the beginning of such a rally now, with the S&P 500 (^GSPC 1.35%) moving higher on Christmas Eve.
What might a Santa Claus rally now mean for stocks next year? I have a prediction for 2026.
Image source: Getty Images.
Santa Claus comes to town a lot
Before I get to that prediction, though, it could be helpful to understand how often and why Santa Claus rallies occur. And Santa comes to town a lot for investors.
Stocks have enjoyed a Santa Claus rally in nearly 80% of the last 50 years. That could indicate that we're due to have one this year. The previous Santa Claus rally was from Dec. 24, 2021, through Jan. 4, 2022, when the S&P 500 rose by 5%.
The largest Santa Claus rally of the 21st century occurred from late 2008 to early 2009. During this period, the S&P 500 jumped 7.4% in a welcome rebound following the steep sell-off in October 2008.
Several theories exist regarding why Santa Claus rallies occur relatively frequently. One is that many institutional investors take time off during the holidays. The idea is that the lack of institutional trading sets the stage for retail investors to influence the market direction more heavily.
That leads me to another popular explanation for Santa Claus rallies. Many Americans receive Christmas bonuses. Some of them could invest part or all of the money in stocks, with the buying pressure driving the market higher (and to a greater extent than usual, because institutional investors are less active).
Naughty and nice
Santa Claus rallies can bring both naughty and nice presents to investors in the form of stock market performance in the following year. The good news is that the gifts are nice more often than not.
Between late 1999 and early 2000, the S&P 500 experienced a Santa Claus rally 17 times. That's less frequently, by the way, than the longer-term average.
The S&P 500 rose in 12 of the years following a Santa Claus rally. The gains were usually quite substantial. The index increased by a double-digit percentage in all but one of those 12 years. In five cases, the S&P 500 jumped more than 20% in the year following a Santa Claus rally.
However, investors sometimes received a lump of coal in their stockings. The most recent example occurred in 2022, when the S&P 500 declined 19.4% after a 5% Santa Claus rally in late 2021 and early 2022.
A prediction for stocks in 2026
It's too soon to know for sure if the S&P 500 will experience a Santa Claus rally this holiday season. I think it's possible that the better-than-expected GDP results for the third quarter of 2025 could weigh on stocks somewhat.
That might seem counterintuitive, but a stronger economy may decrease the likelihood of further rate cuts by the Federal Reserve next year. Many investors are counting on additional rate cuts.
If a Santa Claus rally does occur, though, my prediction is that the S&P 500 will rise again in 2026 – just as it has typically done in the past in the year following a Santa Claus rally. However, I don't expect we'll see a fourth consecutive year of double-digit gains. Santa probably won't be that generous.
