The stock market is ever-changing and unpredictable, and this doesn’t stop when the markets are closed and investors are home for the holidays. There can sometimes be an increase in market volatility during the holidays. Enter the holiday effect.
What happens to the stock market during the holidays?
Things start shifting early. There’s a common phenomenon known as the “holiday effect” or the “pre-holiday effect” that signals a slight uptick in stock prices on the day before a holiday.
There are a few guesses as to why this might happen.
Some experts chalk it down to trading volume—with more investors out on vacation, the moves made by the few who stick around can create more noticeable market fluctuations. Another reason could be overall investor sentiment. Some investors become more risk-averse ahead of the holidays and use the time right before a holiday to sell off riskier stocks as a way to avoid any unexpected bad news that could happen while they’re away.
“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,” says Charles Qi, a chartered financial analyst and CEO of StockPick, an investor-centric video sharing app launching this month. “If recent experience is a guide, markets can be very volatile in December. For example, the S&P 500 Index declined 9.2% in December 2018, one of the largest monthly declines in recent years, while gaining 4.4% in December 2021, one of the best monthly performances in 2021.”
Company performance can also heavily impact stock performance during the holiday months. Despite a higher inflation rate, a staggering number of consumers will still be hitting the stores this holiday season, and early sales figures can cause investors to become optimistic about certain stocks as a result. According to the National Retail Federation’s (NRF) latest forecast, holiday sales are expected to rise between 6% and 8% from 2021 sales during the November 1 to December 31 holiday period. And online and other non-store sales are expected to increase between 10% and 12%.
Dos and don’ts for investors
If the holiday season is making you reevaluate your current holdings, experts say you could try the following:
- Don’t try to time the market. Trying to anticipate how your stocks will perform while you’re away for the holidays could result in bigger losses. “Making investment decisions based on seasonality effects is risky as market performances vary significantly in different years,” says Qi. “Combined with thinner than usual market liquidity, it can be very risky to ‘time the market’ during the winter holiday period. Avoid making any impulsive changes to your portfolio that don’t align with your long-term investing goals.
- Do focus on building long-term wealth. There’s always some level of risk involved when you have your money tied up in the market, but riding out short-term discomfort could translate to major gains in the future. “The best course of action is to stick to long-term allocations and ride out any market volatility during the period,” says Qi.
Don’t let potential short-term losses ruin your holiday spirit or lead you to make any irrational moves to try to mitigate the inherent risk of investing. If you’re going to make a change to your portfolio, make sure that it’s part of your periodic rebalancing and that it aligns with your longer-term strategy, rather than being a knee-jerk reaction to market fluctuations that may or may not happen.
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