Will Santa rally investors’ spirits in December?

The festive season is well and truly upon us as shops launch Christmas promotions, office parties are scheduled and boxes of decorations are dug out of cupboards. As we head into December, in this article we look at the phenomenon of the ‘Santa Rally’ and consider whether it could bring investors some cheer in 2018.

A bright end to the year?

Investors could certainly do with a bright end to 2018. It has shaped up to be a volatile year for the markets, with a bruising couple of months leaving most stock markets currently below where they were in January.

But there is still a month to go until the end of the year, and investors may yet be rewarded by a phenomenon known as the Santa Rally. This is based on the fact that markets have a very high incidence of delivering positive returns during the month of December.

Putting the Santa Rally theory to the test

We have analysed the stock market returns delivered in the month of December to put the theory of the Santa Rally to the test. We looked at up to four decades of data across a range of global stock markets to see how often they delivered positive returns (excluding dividend payments).

As the data shows, the FTSE 100 showed the strongest signs of seasonal cheer. The index of the 100 largest UK businesses rose 79% of the time in December with a healthy median monthly return of 2.4%.

The Santa Rally hasn’t been limited to the UK market, with the MSCI World index of global shares rising 77% of the time during December and gifting investors with a median return of 1.3%. Similarly, the MSCI Europe ex UK index rose 74% of the time with a median return of 1.7% in December.

The effects were less pronounced across the emerging markets, covering the likes of China, South Korea, Latin America, Russia and South Africa, but the longer-term trend suggests December has typically been a positive month nevertheless. Looking at 23 years of data for the MSCI Emerging Market index, shares in developing countries rose 65% of the time in the month of December, with an impressive median return of 3.3%.

What’s the cause?

Although the numbers tell a convincing story, what is less clear is why markets have a tendency to rise during the final month of the year. After all, this is typically a quiet time for companies reporting their results.

One theory is that year-end positive momentum in the markets may be down to fund managers reducing their cash weightings and ‘window dressing’ their portfolios with stocks that have performed well, ahead of reporting periods to clients in the new year.

Investing is for the long term

Of course it is not guaranteed that markets will rise this December, just because they often have in the past. We would strongly caution against investing with a one-month view and instead encourage people to focus on the long term.

But with shares having sold off since October, valuations have certainly come down to much more reasonable levels. It will be interesting to see whether markets will now bounce bank with a Santa Rally buoyed by bargain hunters, or whether December 2018 will buck the longer-term trend.

For more information or if you have any questions about your investments, please get in touch by calling 020 7189 9999 or emailing contact@tilney.co.uk.