Are You Ready for the “Santa Claus Stock Market Rally”

The stock market is a place where tales of riches and famine are often shared and retold. Over time, some of these tales can morph into conventional beliefs.

Unfortunately, conventional beliefs can at times be built on shaky ground and might not hold up to closer scrutiny. One such conventional belief that can’t withstand a trial by fire is the “Santa Claus Rally.” Investopedia defines the phenomenon as such:

“A surge in the price of stocks that often occurs in the week between Christmas and New Year’s Day. There are numerous explanations for the Santa Claus Rally phenomenon, including tax considerations, happiness around Wall Street, people investing their Christmas bonuses and the fact that the pessimists are usually on vacation this week.”

In other words, the “Santa Claus Rally” suggests that we may be on the cusp of a stock market rally with just a week to go to December.

The October Crash that didn’t happen

But hang in there, partner! Don’t press that buy button just yet.

With the benefit of hindsight, let’s take a look at another conventional belief – the “October Effect” – and how it has played out. For the benefit of readers less familiar with the stock market, October happens to be the month in which the Dow Jones Industrial Index – one of the major indexes tracking American stocks – suffered two of its worst ever single-day crashes in history.

It is no secret that this year has been a tough one so far for the Straits Times Index (SGX: ^STI), Singapore’s stock market benchmark. The index had kicked off the year at around 3391 points but has since closed some 14% lower last Friday.

September turned out to be a particularly tough time for the index, as it declined by 4.3% over that month. With a historically-treacherous October following a rough September, it seemed like the ingredients were ripe for history to repeat itself – except that the fabled October market crash didn’t happen at all.  The Straits Times Index actually rose 7.3% in October, busting the notion of the “October Effect”.

Foolish takeaway

Conventional beliefs can sound logical and may find its way into our way of thinking about investing. But, you may want to guard against these thoughts.

As Foolish Investors, we look at businesses and their long-term performance, not on what day of the year or month we’re at.

So, as you weigh the idea of a “Santa Claus Rally” happening in the month ahead, keep in mind on what didn’t happen in October this year. As a hint, the Straits Times Index had barely changed in the month of December last year.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.