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Will Santa gift investors with a stock market rally?

  • December has earned a reputation as a typically strong month for stock markets

  • We look at at 50 years of monthly market data for global equities

  • June is the most dangerous month on average for stock markets, both globally and in the UK

  • Read the full article to find out if investors are going to have a jolly Christmas

Santa rally Santa Claus pays a visit on the floor at the New York Stock Exchange (NYSE) in New York, U.S., November 21, 2018. REUTERS/Brendan Mcdermid
Santa rally: The stock market could be in for a happy December. Photo: Brendan Mcdermid/Reuters

Markets usually make gains from the first trading session after Christmas through the second trading session of the New Year but will this cost of living crisis year bring a Santa rally?

Figures from Bestinvest show that it is not a myth, as December has the highest incidence of any month in providing investors with positive returns, with shares making gains 76% of the time, a far higher proportion than any other month.

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“As the year draws to a close, investors could certainly do with some seasonal cheer. Could the month of December offer up a financial Christmas present? Potentially if history is anything to go by. That’s because December has earned a reputation as a typically strong month for stock markets ⁠— a phenomenon dubbed as the ‘Santa Rally’,” Jason Hollands, managing director at Bestinvest, said.

The data also shows that when it comes to the UK stock market, using the MSCI United Kingdom Index of large, London Stock Exchange listed UK companies, the high success rate for December was also evident, with the month also delivering positive total returns 76% of the time and with an average monthly gain of 2.26% over the 50 years.

Bestinvest’s analysis has identified June as the most dangerous month on average for stock markets, both globally and in the UK. Chart: Bestinvest
Analysis has identified June as the most dangerous month on average for stock markets, both globally and in the UK. Chart: Bestinvest

“However, unlike the global snapshot, in the UK April had the highest incidence of gains overall, delivering positive returns 82% of the time,” Hollands said.

Looking at the MSCI World Index, which is comprised of more than 1,500 of the world’s largest listed companies, Bestinvest found that December proved to be the most consistent month for delivering positive global equity gains, an average total return of 1.45% for the festive month is also high compared to the average monthly return for global equities across all months over the last half century of 0.95.

Looking at the MSCI World Index, average monthly total returns over the last half century ranged from as low as -0.31% in September to as high as 1.71% in January. Chart: Bestinvest
Looking at the MSCI World Index, average monthly total returns over the last half century ranged from as low as -0.31% in September to as high as 1.71% in January. Chart: Bestinvest

“Particularly impressive Santa Rallies were seen in 2010 (6.8%), in 2008 in the aftermath of the global financial crisis (10.2%) and in 1999 at the height of the Dot Com Bubble (6.8%),” Hollands said.

“In his novel Pudd’nhead Wilson the American writer Mark Twain cautioned about October, saying: ‘This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.’ Yet even he might have to admit to December’s festive charms, as it is easily the best-performing month over time,” Russ Mould, AJ Bell investment director, said.

“Since its launch in 1984, the FTSE 100 index has gained 2.3% on average in December, whereas April and July are the only other months to offer an average advance of 1% or more," he added.

For Mould, the Santa Rally is more fact than fiction because the numbers back it up.

Year

FTSE 100 performance in December (ranked)

FTSE 100 performance in following calendar year

1987

8.40%

4.70%

1993

7.90%

-10.30%

2010

6.70%

-5.60%

1989

6.40%

-11.50%

1997

6.30%

14.50%

2016

5.30%

7.60%

1999

5.00%

-10.20%

2017

4.90%

-12.50%

2021

4.60%

2.60%

1984

4.30%

14.60%

2009

4.30%

9.00%

2005

3.60%

10.70%

2008

3.40%

22.10%

2020

3.10%

14.30%

2003

3.10%

7.50%

1991

3.00%

14.20%

2006

2.80%

3.80%

2019

2.70%

-16.90%

1986

2.60%

2.00%

1992

2.40%

20.10%

1998

2.40%

17.80%

2004

2.40%

16.70%

1996

1.50%

24.70%

2013

1.50%

-2.70%

2000

1.30%

-16.20%

2011

1.20%

5.80%

1995

0.70%

11.60%

2012

0.50%

14.40%

2007

0.40%

-31.30%

2001

0.30%

-24.50%

1988

0.00%

35.10%

1990

-0.30%

16.30%

1994

-0.50%

20.30%

2015

-1.80%

14.40%

1985

-1.80%

18.90%

2014

-2.30%

-4.90%

2018

-3.60%

12.10%

2002

-5.50%

13.60%

Source: Refinitiv

Year

FTSE 100 performance in December (ranked)

FTSE 100 performance in following calendar year

1987

8.40%

4.70%

1993

7.90%

-10.30%

2010

6.70%

-5.60%

1989

6.40%

-11.50%

1997

6.30%

14.50%

2016

5.30%

7.60%

1999

5.00%

-10.20%

2017

4.90%

-12.50%

2021

4.60%

2.60%

1984

4.30%

14.60%

2009

4.30%

9.00%

2005

3.60%

10.70%

2008

3.40%

22.10%

2020

3.10%

14.30%

2003

3.10%

7.50%

1991

3.00%

14.20%

2006

2.80%

3.80%

2019

2.70%

-16.90%

1986

2.60%

2.00%

1992

2.40%

20.10%

1998

2.40%

17.80%

2004

2.40%

16.70%

1996

1.50%

24.70%

2013

1.50%

-2.70%

2000

1.30%

-16.20%

2011

1.20%

5.80%

1995

0.70%

11.60%

2012

0.50%

14.40%

2007

0.40%

-31.30%

2001

0.30%

-24.50%

1988

0.00%

35.10%

1990

-0.30%

16.30%

1994

-0.50%

20.30%

2015

-1.80%

14.40%

1985

-1.80%

18.90%

2014

-2.30%

-4.90%

2018

-3.60%

12.10%

2002

-5.50%

13.60%

Source: Refinitiv data.

“The FTSE 100 has served up 11 annual losses since 1984 and ten of those came after a gain in the December of the previous year ⁠— the only exception was 2015, whose 4.9% annual decline came after a 2.3% slide in December 2014," Mould added.

“If anything some of the best Decembers have led to the most treacherous subsequent years ⁠— a buoyant festive season in 1993 was followed by 1994’s Fed rate rise shock, 1989’s knees-up let investors stumble into a recession and a bear market while 1999’s party led to the hangover that came with the collapse of the technology bubble in 2000.

“If nothing else, that may back up Warren Buffett’s old aphorism that: ‘The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.’"

Explanations as to why stock markets tend to do well in December include the markets getting a boost as City fund managers position for the year ahead, investing any spare cash in their funds to ‘window dress’ their portfolios ahead of reporting periods.

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Another is that hedge funds who take negative bets on companies ⁠— known as ‘short positions’ ⁠— close out some of these positions before the year end. This would require them to repurchase shares that they have borrowed off other investors in order to sell them and then hopefully repurchase them at a lower price later, before returning the shares to the stock lender.

“Of course, it could just be a case of seasonal cheer and the magic of the festive season,” Hollands added.

Stocks try to get into the Christmas spirit

Stocks did gain ground this week after some good earnings and consumer confidence figures from the US but was it enough?

"The question is whether the bounce off the Tuesday lows is the seasonal Santa rally taking shape. It’s always a bit of a guess at this time of year…you could easily see 4,000 retested on the S&P 500 before the resumption of the downtrend, which is still in charge overall," Neil Wilson, chief market analyst at Finalto, said.

"Bulls would require a breach of 4,100 to consider a more sustained rally was taking shape. Ultimately the inflation/recession/tightening narrative cannot be ignored and I believe firmly there is at least one more major flush ⁠— the big one, way bigger than we have seen in 2022 ⁠— to wipe out the bulls ⁠— there is just too much bullishness still," he added.

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