Investing in dividend-paying stocks is a great way to add a steady...by Ashley Grasse
Holidays & Investing: Does Christmas Affect Your Stock Investments?
Announcement: All major U.S. stock markets will be closed on Monday December 26, 2022 for the Christmas holiday.
As the holidays approach, you might be wondering if Christmas will affect your investment portfolio. The short answer is yes, there may be an effect; although not for the reasons you might think. How Christmas (and other holidays) affect the stock market is less about cold economic facts and more about the emotions and psychology of traders.
Let us take you through how the Christmas holiday affects the stock market, what you might see happen in your portfolio, and how we recommend managing your portfolio this holiday season. Let’s dive in.
Do Holidays Affect the Market?
Yes, holidays can have an effect on the stock market. But to be fair, everything affects the market.
Holidays, politics, weather, war, natural disasters, sporting events – if it affects people, it affects the market. While some traders and analysts would like to believe that the stock market is a perfectly rational and efficient machine, it rarely behaves that way. The market is the sum total of millions of decisions made (mostly) by human beings. And humans are not always rational.
On the most basic level, holidays affect the market because the market closes on holidays. If the market is closed, we can’t trade (for the most part). Pretty simple. The chart below shows the standard market holidays throughout the year.
- Presidents’ Day
- Independence Day
- Good Friday
- Labor Day
- Memorial Day
- Thanksgiving Day
- Christmas Day
But everyone knows this. What traders really want to know is whether the holidays present an opportunity to make (or lose) money, and what should we do to take advantage of this opportunity. Do holidays create a repeatable pattern we can exploit to expand our wealth? Some say yes, others say no. The data is inconclusive.
Let’s talk about calendar effects.
What Are Calendar Effects?
Stock trading – like professional sports – is a high-stakes enterprise. Any edge, no matter how small, might be a winning opportunity. And like athletes, stock traders can be influenced by factors that are less than scientific. While a stock trader is unlikely to avoid washing his socks like an MLB pitcher on a winning streak, he still might be susceptible to similar psychological traps.
A common debate among market pros is the influence of calendar effects, which are a type of market anomaly that suggests the market behaves predictably based on the time of year. While there is some data to back up the claims, calendar effects are far from a sure bet.
As we said, the market reflects the psychology of the traders involved. People live by a calendar that operates on daily, monthly, and yearly cycles, so it’s bound to have some effect on trader decisions. But is it useful to predict future performance? That’s not quite so clear.
How Christmas Affects the Stock Market
The market is always closed on Christmas (Christmas is on a Sunday this year, so the market will be closed on Monday instead). But beyond that, Christmas is a unique time because several calendar effects converge in the days and weeks surrounding the holiday, making the Christmas holiday a calendar effect “perfect storm.”
Here are a few of the calendar effects that occur around Christmas:
Santa Claus Rally Effect
We have a calendar effect known as the Santa Claus rally, which suggests that stock prices tend to rise during the final trading days of the year following Christmas and the first two days in January.
It’s unclear exactly why the Santa Claus rally occurs, though it’s probably the result of several factors, each of which might have more or less influence in different years.
One factor is that institutional traders and other professionals tend to go on vacation during this time, which reduces trading volume and leaves individual retail investors with more influence over the market. As the holidays are an optimistic time, regular people are more likely to buy and drive up prices – with no pessimistic institutional investors around to add negative pressure.
There is some data to back up this claim – since 1950, stock prices have risen an average of 1.3% during this 7-day period, and returns have been positive around 75% of the time.
While these are good odds, it’s hardly a sure bet.
The Holiday Effect
The holiday effect suggests that stock prices will trend down in the weeks and days leading up to a holiday, then suddenly rebound on the day before a holiday – particularly around Thanksgiving and Christmas.
Again, the reasons are not exactly clear. The best explanation is a psychological effect where people are happier and more optimistic the day before a holiday. If you’ve been watching a stock drift toward a price you like, the jubilant atmosphere on the day before a holiday is when you might talk yourself into buying.
The Year-End Effect
Closely tied to the Santa Claus rally, the year-end effect occurs as investors re-balance their portfolios for tax purposes. Generally, investors want to unload losers from their portfolios so they can use the losses to offset capital gains on their tax returns. This is called “tax-loss harvesting”.
This effect is likely driven by individual investors who are more sensitive to the yearly tax cycle. Until you sell a stock, your losses or gains aren’t “realized.” But once you sell, you now need to report to the IRS that you gained or lost money. Tax rules allow you to deduct losses from your capital gains taxes – a nice consolation prize that takes the sting out of your losses.
Stock prices are also affected by the holiday shopping season, as many retail businesses don’t become profitable until Christmas. Portfolios that are heavily invested in retail stocks may be particularly affected around this time – for better or worse. This could increase buy or sell pressure, depending on the results of the shopping season.
The January Effect
After traders sell off stocks in December, they usually want to reinvest funds in January, which increases buy pressure and drives up prices. This is where it gets its name – the January Effect.
Also, traders who receive Christmas or year-end bonuses might have new capital to invest, further increasing prices.
The effect is particularly noticeable in small-cap stocks, which is what retail investors are more likely to buy. As a result, small-cap stocks tend to outperform the overall market in January – sometimes. In 1982, 1987, 1989, and 1990, large-cap stocks outperformed small-cap stocks in January. So, again, not a sure bet.
The Monday Effect
Finally, we have the Monday effect, which is similar to the holiday effect. In this case, stock prices tend to open lower on Monday than where they closed on Friday.
Nobody knows why this happens exactly, but it most likely reflects the simple psychological reality that people are happier and more optimistic on Fridays and more pessimistic on Mondays. The same stock investment that seemed like a great idea before the weekend might not seem so wise when you drag yourself to work on Monday.
Again, the market is not a machine. It’s just people, and people act emotionally.
Check Out How Christmas Affects Your Investments!
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This will let you track and analyze how the market is performing, as well as your own investments not only during the holiday season but all year round!
Christmas Investing Strategy: Avoid The Hype
We just listed five separate calendar effects that sometimes – but not always – influence stock prices around Christmas. And to complicate matters, Christmas is on a Sunday and the market is closed on Monday.
So what does that all mean?
- Will prices be down on Tuesday due to the Monday Effect?
- Or does it get canceled out because it’s not actually Monday?
- Or will it be canceled out by the Santa Claus Effect?
- How will these calendar effects interact, and how will they affect stock prices? Nobody has any idea.
Of course, after the fact, it will be easy to explain what happens and why. Hindsight in the stock market is always 20/20. Ask any analyst, they will always be able to break down why market moves happened, but this isn’t much use beforehand.
The point is, you can go nuts thinking about all this, so our recommendation is: don’t get caught in the hype.
Trying to game the market is hard, and it’s even harder during the holidays, so better to just watch the market from the sidelines. Don’t try to buy and sell in the chaos – it won’t matter much in the long run anyway.
The one exception would be if you plan to sell off stocks for tax-loss harvesting purposes. But again, this is part of a long-term investment strategy, not an attempt to game the market to make a quick buck.
Enjoy The Holiday Season!
We hope this article has shed some light on what you can expect to see in the market around Christmas. While we have given names to some of the effects you might see, know that this is always an after-the-fact analysis. What remains true is that nobody knows what will happen in the future – in the market or anything else.
Instead, we recommend sticking to your strategy, forgetting about the market for a few days, and enjoying the holidays with your loved ones!
You can always keep an eye on the market through Christmas and into 2023 to see if any of these effects materialize. Tracking the market’s performance and their own is always a great tool for any investor.
StockMarketEye, our stock tracking software platform, gives you real-time updates so you can keep your finger on the pulse of the market.
Let us know if you do spot any of the holiday, Christmas, and other seasonal effects!