Last month we talked about "the new fundamentals," but our discussion left out this season’s primary water cooler topic: The Santa Claus Rally. Even though there’s less emphasis on its predictive powers, we still tend to talk about the concept, and even more at this time of year.
The question now: should it still get so much attention? Has the hypothesis played out? What types of macro conditions could be responsible?
Pull up a chair.
The Santa Claus Rally hypothesis says that the market performance between the last week of December and the first few days of January will set the tone for the upcoming year.
If that period’s performance is negative, the hypothesis says to expect a flat or down market for the full year. A positive result can mean a positive year.
When we run the numbers, the Santa Claus Rally hypothesis has failed three times in the past ten years.
The ’15-’16, ’23-’24, and ’24-25 periods all delivered low single digit losses during the pivotal Santa Claus Rally weeks, but still recorded up years for Mr. Market. Over the last two calendar years, negative Santa Claus Rally performance was largely because of single stock headlines and broad profit-taking within the Magnificent 7.
Therein lies a major hangup: how can we rely on this hypothesis in 1) such a concentrated market and 2) in a market so reliant on outperformance in information technology?
Now more than ever, headlines have a way of taking the market for sleigh rides. In last month’s letter, we covered how performance increasingly depends on a combination of positive results, outlook/sentiment, and optimistic headlines concerning a relatively small group of companies.
Typically, that news rolls over like water off a duck’s back; bears digest the negativity, bulls swoop in to buy the dip, and repeat. On top of that, we’ve got year-end rebalancing trade settlements that will take us into those first few days of January.
The fourth calendar quarter is somewhat unique as investors aim to take gains and harvest losses, tying ribbons ‘round their taxes ahead of the new year.
I’m not sure about you all, but it looks increasingly to me like this hypothesis is held together by no more than the Christmas spirit and gumdrop buttons. Instead of setting our hopes solely on the broad market and drinking the proverbial eggnog, we keep our eyes on the prize: companies that have the potential to outshine peers across the cycle.
Don’t get me wrong, I understand the desire to "fit in." We all had to survive primary school. But playing all the other reindeers' games can come with its own costs. Following the herd and basing investment decisions on general sector trends may cause one to miss individual opportunities for companies that stand out with performance that doesn’t follow the consensus. While taking an active approach to the market means you’ll sometimes fall short of the benchmark, other times you might not only avoid overblown fallout, but potentially experience individual wins to a greater degree.
Here are some examples.
During the inflation scares and rate hikes of 2022 and 2023—and recently in 2025 following the introduction of higher tariffs—the consumer staple sector as a group had thoroughly underperformed the broad market at the index level.
However, within that sector, fast forward a couple years, and in the trailing twelve months ending 12/22/2025, Walmart* was among the top performers in the S&P 500 Consumer Staples Index over the measurement period. The individual stock outperformed the S&P 500 Consumer Discretionary Index, The S&P BMI Consumer Discretionary & Retail Index, and the S&P 500 despite the overall underperformance of its sector.
Over that same measurement period, the Magnificent 7 have dominated the market and been responsible for much of the recent explosive performance of the S&P 500. When we take a moment to pop the hood though, things get a little more interesting. Magnificent? Sure. All the same? Not quite.
The Mag 7 comprises three different GICS sectors, and we’re looking at six different sub-industry representations within the group. The common thread is exposure to artificial intelligence-related expansion opportunities, both proved and perceived. Following the herd could look like buying the index, capturing gains from the top performers, and calling it a day. A more active approach would notice that the performance isn’t so evenly distributed amongst the constituents.
In the trailing 12 months ending 12/22/25, Amazon* markedly underperformed both the S&P 500 and the S&P 500 Consumer Discretionary Index. Similarly, Apple* modestly outperformed Consumer Discretionary but underperformed the S&P 500, putting up a mid-single digit return against over 15% for the S&P. In fact, most of the index’s performance for that period was attributable to just two companies in the Mag 7 returning over 30% and 50%. In this example, we can see the trap of treating very different companies as equals when the group is doing well as a whole. We can’t just look at the sum; we must examine the parts.
What have we learned in this, the world’s shortest "case study?" Individual stock selection matters. And if selection matters, then quality must matter even more. Some would say selection’s red nose might be bright enough to guide you through a foggy market.
If you’ve read my prior letters, you know exactly where this is going. Staying active keeps the door open for opportunity. Walmart* and Mag 7 seem like obvious examples and perhaps low hanging fruit, but my word count is limited, so cut me some slack! In my regular work I can see how holding to our quality standard serves our active portfolios, from our $13 billion portfolio companies up to the mega caps. That means we’re staying alert and agile heading into the New Year, whether Mr. Claus rallied or not.
Until Next Time,
Shelby