By Pete Trontis, Partner and Senior Portfolio Manager
As the calendar winds down and year-end approaches, investors often look for what is known as the “Santa Claus Rally,” a tendency for equity markets to experience a modest uptick in the final week of December through the first couple of trading days in January.1 Historically, this phenomenon has been observed in U.S. markets, with studies suggesting that the S&P 500, on average, posts positive returns during this period more often than not.1
One factor behind year-end gains is mechanical buying driven by structured products.2 Many structured products—such as equity-linked notes, options-based derivatives, or institutional overlay strategies—have payout formulas or hedge triggers tied to market levels and time frames.3 As options near expiration or derivative overlays get rebalanced, these products often force automatic hedging or rebalancing activity. That flow can create concentrated buying pressure in the underlying equities and contribute to the seasonal pattern we typically see at this time of year.
Another important contributor is the behavior of asset managers near year‑end. Many funds engage in so-called “window dressing,” selling underperforming stocks and adding well‑performing names to make their portfolios appear stronger in year‑end reports.4 Simultaneously, managers often chase winners, adding positions in stocks or sectors that have recently performed well, in hopes of demonstrating strong momentum heading into the new year. Together with the mechanical buying from structured products, these activities can add upward pressure to equities, especially in heavily traded large-cap stocks.5
Being aware of these year-end market mechanics can help us better understand why the market may behave the way it does. Even so, this awareness doesn’t provide us with a definitive strategy for trading stock assets. Markets behave in unpredictable ways that move returns far away from what we think of as market averages. Last year, for instance, investors didn’t experience a Santa Claus Rally but instead saw markets fall in late December.6
Rather than trying to guess how markets may behave in the near term we want to make investment decisions based on the prices markets present to us. With valuations already at historically high levels for U.S. large cap stocks, we might want to use any rally as an opportunity to pare those assets in January and rebalance into assets that are underweighted or potentially undervalued. If you have any questions, please reach out to your Exencial advisor.
Sources:
- Investopedia (12/20/24) - Santa Claus Rally: What It Is and Means for Investors
- Bankrate (11/21/24) - Triple Witching: What That Means and When to Expect the Next Triple-Witching Date
- Morningstar (5/8/23) - Understanding Structured Products in 4 Charts
- Nasdaq (data as of 12/3/25) - Window Dressing Definition
- Fortune (11/29/25) - Santa is Coming to Wall Street Early this Season, and Analysts Say 2026 is Shaping up to be Another Big Year of Gains
- Barron’s (1/3/25) - No Santa Claus Rally, No Problem for the Stock Market
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S&P 500® Index (S&P 500®) is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
