End of year rally stock market: meaning and historical results
After a few difficult months on the stock market, there may be some good news. Around the end of the year, share prices often show an upward trend. Statistically speaking, this is the best stock market period of the year. This trend is called the end-of-year rally on the stock market . Will there be an end-of-year rally in 2022? A question that investors have every year. In this blog, we will discuss what exactly the end-of-year rally phenomenon entails.
What is a year-end rally?
The end-of-year rally is one of the most well-known stock market phenomena. The end-of-year rally on the stock market is also called the ‘Year-End Rally’ or the ‘Santa Claus Rally’ . They all mean the same thing: an end-of-year rally occurs at the end of the calendar year, when stock prices tend to rise.
In the Netherlands, the end-of-year rally is well-known, but in the US the phenomenon is even more visible. Here it is often called the ‘Santa Claus Rally’. The rally has no fixed period, but refers to the last weeks/months of the year. Many stock market analysts already drop the term at the beginning of November.
What’s Driving a Year-End Rally in the Stock Market?
There are several factors that can contribute to a year-end rally. One factor is that investors are more optimistic about the future prospects of the economy and the stock market at the end of the year . This can lead to increased demand for stocks, which in turn can push up prices on the stock market.
Another factor is that mutual funds and other institutional investors are looking to rebalance their portfolios as the year draws to a close. This may involve selling underperforming stocks and buying more stocks that have done well. This activity can also help to boost stock prices.
Another reason is that fund managers often clean up their portfolios at the end of the year . Losing positions are removed from the portfolio and winners are retained and added.
Finally, some investors may take advantage of tax considerations by selling stocks that lost value earlier in the year and buying stocks that did well. This may also help to boost stock prices at the end of the year.
It is important to note that not all years see a year-end rally in stocks, and there is no guarantee that one will occur. Stock prices are influenced by a variety of factors, including economic conditions, company-specific news, and market sentiment.
Historical results of the end of year rally
Looking at historical results, it turns out that the end-of-year rally is not a myth and does indeed occur. The returns of the S&P 500 companies are often above average in November and December. January is also generally a good month, this has not gone unnoticed as there is also the phenomenon of the ‘January effect’.
The January effect occurs mainly because some investors close positions in connection with tax returns (for example in the US). These investors then often open new positions in January, which causes the upward effect.
Will there be a year-end rally on the stock market this year?
The stock markets have generally had a bad year. There is a so-called ‘ Bear market ‘. Due to a decline, there is a chance of recovery and a year-end rally could take place. However, keep in mind that not every year has to have a year-end rally.