Thinking about what to write this week, I suggested to my editor: ‘what about an article about a Santa Rally?’. I got an excited response of ‘How fun!’. The truth of the matter is that a Santa Rally can ‘be fun’ if you are an investor benefiting from a stock market rally at the end of December – or alternatively it can be rather underwhelming (if it doesn’t happen, that is).
Every year, every investor hopes for a rally to lift their portfolio. Sadly, along with other stock market superstitions – ‘Sell in May and Go Away’ or ‘Beware of the Ides of March’ – this rarely happens… until now.
Research from Fidelity International, taking into account the last 30 years’ history of the FTSE 100 index in December, shows that out of those 30 years, 26 of those produced a Santa Rally.
December returns of the FTSE 100:
Source: Fidelity International, November 2017. FTSE 100 Total Returns
Although this data looks impressive, Fidelity’s Tom Stevenson errs on the cautious side: ‘As far as short-term buy signals go, the ‘Santa Rally’ seems to have a surprisingly successful hit rate, with the final month of the year yielding positive returns in all but four of the past thirty years.
‘However, while the statistics show that the Santa Rally may exist, it would be unwise to rely on such a trivial and short-term strategy, or any of the other stock market superstitions when making your investment decisions. Trying to time the market to take advantage of these short-term trends can have very costly consequences if you get it wrong.’
So how will the Santa Rally materialise at the end of the year?
Tilney Group’s Jason Hollands has a few ideas. Hollands doesn’t believe the Santa Rally is down to general optimism about end of year bonuses and Christmas cheer, but is more to do with hedge funds closing down short positions and buying back shares in order to return them to the institutions who lent the shares to them.
He says: ‘With stock markets currently riding high and market volatility as calm as a duck pond, there is every possibility of yet another good month this December. Potential upsets to this cheery scenario include another nuclear test by North Korea or a major set-back in the planned overhaul of the US tax code, which President Trump and Republican Congressional leaders hope to achieve by Christmas.
‘In truth though, it is nigh-on impossible to predict short-term market setbacks and it is better for investors to stay focused on their long-term objectives. While US shares do look expensive compared to historical trends, a large part of this is down to sharp rises in technology company shares which now collectively account for around 23% of the S&P 500 Index.
‘In contrast UK equities appear fair value and continue to offer attractive dividend yields, the outlook for European companies is positive with strong earnings momentum and for value hunters Global Emerging Market shares are still trading well below longer term trend, despite a strong year of share price returns.’
So investors may have to adopt a ‘wait and see’ approach in the coming weeks. Brexit UK divorce bill anyone?