After a bumpy autumn for markets, will Santa rally investors’ spirits?

With December now days away, the festive season is cranking up as the shops launch Christmas promotions, office parties are scheduled and boxes of decorations are being dug out of cupboards.

Investors could certainly do with some Christmas cheer: 2018 has shaped up to be a volatile year for the markets, with most stock market indices trading lower than where they started 2018 after a bruising couple of months.

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

Bestinvest, the online investment service, has analysed the capital returns experienced in the month of December, looking at up to four decades of data across a range of stock markets to put the theory of the Santa Rally to the test. The online investor service has found that there is indeed strong evidence that markets typically deliver rising share prices during the festive season.

Source: Bestinvest / Lipper. Data represents capital return only and excludes the impact of dividends. Data is for periods commencing December 1978 to December 2017, other than for FTSE 100, MSCI Europe ex UK and MSCI World (each of which commence December 1979) and MSCI Emerging Markets (from December 1995).

Of all the market benchmarks Bestinvest looked at, the UK’s FTSE 100 Index of large and typically internationally focused businesses has shown the strongest pattern of seasonal cheer, with share prices having risen 79% of the time in December and a healthy median monthly return of 2.4% during the month.

But the magic of Christmas hasn’t been limited to the UK market it seems with the MSCI World Index, which follows the performance of shares across the globe, rising 77% of the time during December and gifting investors with a median return of 1.3%.

Bestinvest found the Santa Rally was less pronounced across the emerging markets, which cover the likes of China, South Korea, Latin America, Russia and South Africa. These markets have had a particularly gruelling 2018 so far, but the longer term trend suggests December has typically been a positive month nevertheless. Looking at data for the MSCI Emerging Market Index, which goes back to 1995, shares in developing countries rose 65% of the time in the month of December, with an impressive median return of 3.3% - the highest of all studied.

Jason Hollands, Managing Director of Bestinvest, commented: “The data suggests that the so-called Santa Rally is a very convincing phenomenon and this is without also including the positive effect of any dividends paid during the month.

“What is less clear is why markets have a tendency to rise during the final month of the year. This is, after all, 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.

“Of course there is no inevitably 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 back with a Santa Rally buoyed by bargain hunters, or whether December 2018 will buck the longer-term trend.”