Understanding Stock Market Behavior During Holiday Seasons

The stock market is ever-changing and unpredictable, and this certainly doesn't stop when the markets close and investors step out for their holidays. There is often an increase in volatility during the holiday period, leading to what is known as the 'holiday effect.' This phenomenon is significant for investors who need to understand its implications to make informed decisions.

What Happens to the Stock Market During the Holidays?

Early shifts in the market can be observed through the 'holiday effect' or 'pre-holiday effect,' which often results in a slight uptick in stock prices on the day before a holiday. This phenomenon is not fully understood, but several theories have been proposed. One explanation is the reduced trading volume, with more investors out on vacation, making the moves made by the few who stay around more noticeable. Another theory attributes this effect to overall investor sentiment. Some investors become more risk-averse just before holidays, selling off riskier assets to avoid any unexpected news while they are away.

Factors Influencing Holiday Season Stock Market

Charles Qi, a chartered financial analyst and CEO of StockPick, a new investor-centric video sharing app, explains, 'Many factors affect stock market performances during the winter holidays, including thinner liquidity, the pre-holiday effect, and the quarter-end and year-end rebalancing activity by institutional investors.' Qi shares that recent experience suggests the market can be volatile in December, with notable examples such as the SP 500 Index declining 9.2% in December 2018—among the largest monthly declines in recent years—and gaining 4.4% in December 2021, one of the best monthly performances in 2021.

Company Performance and Holiday Season

Despite higher inflation rates, the holiday season remains a time of increased consumer spending. According to the National Retail Federation (NRF), holiday sales are forecasted to rise between 6% and 8% from 2021, with online and other non-store sales increasing between 10% and 12%. This positive outlook can lead to investor optimism about certain stocks.

Investing During Holiday Seasons: Dos and Don'ts

Do Not:

Try to time the market. Anticipating how your stocks will perform while you're away for the holidays can lead to bigger losses. Qi warns, 'Making investment decisions based on seasonality effects is risky, as market performances vary significantly in different years. Combined with thinner than usual market liquidity, it can be very risky to time the market during the winter holiday period.' Make impulsive changes to your portfolio that do not align with your long-term investing goals.

Do:

Focus on building long-term wealth. There is always some level of risk involved when you have your money tied up in the market, but staying focused on long-term goals can lead to major gains in the future. Qi advises, 'The best course of action is to stick to long-term allocations and ride out any market volatility during the period.'

The Takeaway

Do not let potential short-term losses ruin your holiday spirit or lead you to make irrational moves to mitigate the inherent risk of investing. If you need to rebalance your portfolio, make sure it aligns with your long-term strategy rather than being a knee-jerk reaction to market fluctuations. Remain patient and flexible, and focus on the bigger picture.

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