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Christmas bonuses, presents under the tree, family sitting together and relaxing. These are the things most families take for granted on Christmas.
But aside from all the caroling and holiday cheer that’s headed our way, in the world of finance, a trend known as the “Santa Claus” rally is another phenomenon that’s worth considering. At a success rate of around 80% historically (from data going back to 1950), the period of time between the last five trading days of the year and the first two weeks of January of any given year tend to end higher.
Those are some pretty stacked odds, and the odds of such returns happening again is what keeps this self-fulfilling prophecy alive (according to some pundits).
With that said, as we approach the holiday season, let’s dive into three things investors can do to make this potential upcoming Santa Claus rally as profitable as possible.
Focus on Sectors That Can Really Rally
If you think holiday spending will surge during a specific holiday season, buying retail stocks may make the most senses. Artificial intelligence is all the rage these days, and a boost of holiday cheer could bring up valuation multiples significantly.
The idea is that coming up with an overarching thesis that could drive solid buying pressure during this upcoming hot season for stocks could potentially drive big gains, if that thesis plays out. But having a thesis to start with is the key.
With holiday bonuses, and less tax selling driving purchases of stocks during this period, it’s typically a “rising tide lifts all boats” kind of market. Thus, many sectors will typically work during this three week period.
However, improving ones odds by picking sectors that outperform significantly can lead to a strong end of year return, which is what we’re all after. For stock pickers and traditional index fund investors alike, adding a little capital to the pot before this period of time can be a smart move.
Tactical Capital Deployment Is Key
Having capital to deploy is great. But throwing darts against a wall is a game best played by the untrained.
Investors who want to capitalize on this potentially profitable period of the year would be best served by deploying their capital wisely. For those looking to capture the potential near-term upside offered by the market during these end of year rallies, potentially funding these investments with end of year income such as bonuses or what’s in one’s savings accounts (and replenishing those accounts in the new year) can be a profitable exchange.
It all depends on one’s resources and risk tolerance. But this is indeed the time of year where moving money around can pay big dividends (figuratively and literally). Tax-loss harvesting and other strategies are best discussed with a financial advisor, but there are plenty of things that can be done to maximize one’s set up for 2026.
In my view, this is also the best time of year to think about reallocating capital within one’s portfolio. So, in tandem with the first item on this list (picking sectors one thinks will outperform over this period of time), investors can potentially maximize their upside and feel good about their set up kicking off another important year.
Don’t Forget About Managing Risk
The other key factor I’d point out that matters a great deal (and often isn’t discussed enough in financial circles) is that risk doesn’t stop during certain periods of time. In terms of seasonality and cyclical behaviors of investors, this is traditionally a good time of year to be invested. But that doesn’t mean that some big macro shock (a financial crisis, war, pandemic, etc.) can’t happen out of the blue smack dab in the middle of investors’ anticipated money-making period.
Ensuring investors have a well-diversified portfolio that can handle the 20% of times when Santa Claus doesn’t show up to the party is a good idea. Diversifying across sectors as well as asset class sizes can be a good idea.
Portfolio diversification always matter, and there’s never a time to go “all in.” That’s my point with this last item on this list – safety is longevity, and longevity is everything in the world of investing.