Wall Street likes to think of the stock market as a long-term, dispassionate discounter of the economy and corporate earnings. And in the long term, it more or less is.
In the short term, however, it’s a howling hodgepodge of emotions that plunges on trivial news and soars on the thought of roasting turkey — as it probably will today.
Investment sages have long noted the tendency of the stock market to rise before significant holidays, such as Christmas, Thanksgiving and the Fourth of July. For those with patience, discipline and a taste for paying short-term capital gains taxes, buying before a major holiday and selling the day after is a reasonably lucrative strategy. According to The Stock Trader’s Almanac, the week before Thanksgiving is now up 18 of the past 23 years on Dow Jones industrial average.
Christmas season is even better. “December is the number one S&P 500 month and second best for DJIA since 1950, averaging gains of 1.7% on each index,” writes Jeff Hirsch, editor of the Almanac. Small-cap stocks typically start to rally in early December. And in years when stocks don’t show a gain between Dec. 24 and the second trading day of the new year, the new year typically isn’t very happy.
Why the December rallies. Some try to explain bursts of consumer spending, which is quite possible, while others note that companies often set their budgets for new equipment in the new year. But really, it’s just because the Christmas season is a festive time for nearly everyone. And in the short term, that’s enough to give stocks a boost.