If you have participated in the U.S. markets for more than a year, then you have heard of the Santa Claus rally. This is a phenomenon that the media will make a fuss over as we near the Christmas holiday. In short, it is a phrase used to describe the market rally that historically takes place as Christmas, and the end of year, approaches.
Traders think that one reason for the Santa Claus rally is that investors are adjusting their portfolios. It is common for investors to want to lock in their losses for the year and use that capital to add to winning positions. The thought is that they can reduce their tax bill in the current year while extending any capital gains tax into the next year.
This year is of particular interest due to the potential for tax reform in the new year. The thinking goes: why take a capital gain this year when you may get a tax reform next year that might reduce your tax rate? For this reason many feel that investors will hold onto their gains until the new year to see if they can save some money from tax reform.
This leaves the investor with excess capital needing to be deployed and it seems, as of now, that those investors are looking at the retail sector. Since the beginning of November the retail sector
Retail stocks have taken a beating, but more and more data shows that the consumer is flush with cash and ready to spend this holiday season. If retailers begin to report strong black Friday sales, this could further fuel the push that we have seen in recent weeks.
So maybe this year the Santa Claus rally will pull the retail stocks out of their funk and attract more attention from the bulls.