Ecoinometrics - The Christmas rally
Risk assets have a tendency to rally around Christmas. How is it shaping out this year?
It is that time of the year where every stock investor expects a gift for Christmas. But is Santa going to come this year? Let’s look at what the data says.
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The Christmas rally
The Christmas rally is this period at the end of the year starting a few days before Christmas and extending all the way until the first week of the new year where risk assets (but not only) have a tendency to post positive returns.
For this particular analysis we’ll assume that risk assets tend to be correlated even during the Christmas period. That means if you get the picture for one representative asset of the class you can assume the same kind of trend plays out for the others.
Now honestly as I’m writing those lines I feel like this is something we may not want take for granted. So maybe we’ll do some analysis of correlations by time of the year in a future issue of the newsletter.
For today though there is no doubt we live in a market regime where Bitcoin and the stock market are correlated. So let’s take the SP500 as our reference. The main advantage for this one is that it is easy to reconstruct about 100 years to get a more robust analysis.
We will make the Christmas rally period start three trading days before Christmas and end 10 trading days after Christmas’s eve.
If we look at roughly 100 years of data we get the following collection of stock market trajectories over the period of the Christmas rally. On the vertical axis you can read the total return from the start of the Christmas period. Time flows along the horizontal axis. Trajectories are coloured in red for the one producing positive returns and blue for the ones representing negative returns. The points are the terminal returns over the Christmas rally period.
See for yourself.
Now it should be obvious at first sight that there are more trajectories ending up on the positive side than the negative side. Hence the famous Christmas rally.
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