The Covid-19 pandemic has made 2020 one of the toughest years for markets and many investors may be looking forward to the seasonal boost from a ‘Santa Rally’. But with economies still struggling to deal with the ongoing impact of Covid-19, is a Santa Rally less likely this year?
The ‘Santa Rally’ usually describes a sustained increase in the stock market, which occurs during December. Although there are several theories as to why this festive event frequently occurs, the exact science of the ‘Santa Rally’ is hard to prove.
Some put it down to the general seasonal optimism from the Christmas holidays increasing investor sentiment. Others say it’s due to large institutional investors settling its books for the end of the year and fund managers investing remaining cash to boost their portfolios before reporting in the new year.
Another theory is that the rally is caused by investors buying stocks in anticipation of the rising stock prices in January, otherwise known as the ‘January effect’.
Looking back at the final month of previous years with an economic recession and in 2008 markets saw an end-of-year rally.
Performance of indices in December 2008 (local currency)
Source: FE Analytics
But in December 2000, the year of the dotcom bubble burst, markets fell with a minor rally in the closing days of the year.
Performance of indices in December 2000 (local currency)
Source: FE Analytics
Jason Hollands, managing director of Bestinvest, said his research showed that the UK stock market has delivered positive total returns 84 per cent of the time during December since 1989.
Hollands said while the ‘Santa Rally’ is one of the more convincing seasonal investment trends it’s not a guarantee that it will happen every year.
“Indeed, December 2018 and 2002 were particularly tough months and so we would urge investors to focus on longer-term time horizons,” he said.
And Steven Bell, chief economist for BMO Global Asset Management, has backtracked on his previous pessimism that a ‘Santa Rally’ will occur this year.
He said: “We’re another week closer to the end of this extraordinary year. Stock markets, well they’re a bit higher.”
He said last week he’d been predicting a setback on the basis that markets had already priced-in the vaccine good news and investors had therefore become complacent.
“Well despite all of that the rally continued and I now think that I have to concede that while I got it wrong. That we’re probably headed for the famous Santa Claus rally.”
Both Bell and Hollands agreed that this final month was going to be especially significant for the UK market as it goes through the last days of Brexit trade negotiations with the EU.
With just a few weeks days until the Brexit ‘transition period’ ends, there’s still no clarity on what a Brexit trade deal will look like, if any.
Hollands said if a trade deal can be negotiated this, combined with the positive Covid-19 vaccine news the combination could bring a substantial lift to the UK market.
“The UK stock market has quite high exposure compared to other markets to some of areas hardest hit by the pandemic, such as energy and financial services,” he said.
“If global investor confidence grows that the end of the pandemic is in sight, and post-Brexit trade uncertainties substantially lift, it could bring renewed interest in UK shares for their recovery potential.”
Bell added: “If the market can move ahead on that news I’d expect a further boost if we get - as our assumption - a deal on Brexit between the UK and EU over the next few days.
“Yes, it will be a fairly ‘thin’ deal to be sure, with some set clauses and review periods. But it would be a deal nonetheless. Much better than if it all ended in acrimony.”
Looking at the final month of the year and Premier Miton Investors multi-asset manager Anthony Rayner, said the main question investors should be asking is not ‘will there be a Santa Rally?’, but’ will growth or value lead markets out of 2020?’.
As a follow-up, he asked if the value rally did occur what assets will lead it?
The growth style has significantly outperformed value for much of the past decade as ultra-loose monetary policy and the low rate environment has drawn investors into higher growth options.
Indeed, during the initial recovery from the Covid-19 sell-off growth stocks very much led the way.
But positive vaccine news recently has been a significant catalyst for value stocks, which have rallied.
Performance of growth versus value YTD
Source: FE Analytics
“Even though there has been a hand break turn in markets, many investors still frame the debate in a binary context,” said Rayner. “Will value outperform growth, emerging market outperform developed markets, oil outperform gold, or the reverse of all of these?
“This is with some justification, as asset class behaviour has been increasingly categorised into two broad groups: those that benefit from higher US Treasury yields, and those that benefit from lower yields.”
On whether value or growth will lead markets out of 2020 Rayner said that, unusually for the multi-asset team “we remain firmly planted on the fence”.
He said it he doesn’t see a “consistent or sustained trend either way” in either value or growth and performance might not be defined so easily in the future.