There is a phenomenon in investing whereby stocks rise towards the end of the year for myriad reasons. This has been dubbed the ‘Santa rally’ and is one of the rare flighty investment terms that has some merit.
Most idioms are largely born out of some historical truth – for example the ‘go away in May and don’t come back until St Ledger’s Day’ is one from decades ago when markets tended to slow down over the summer months as traders went on holiday – but are largely meaningless now in a world where trading is done online and markets are available almost all the time.
Yet the Santa rally is one that investors can almost guarantee. we showed data from AJ Bell, which highlighted that FTSE 100 companies on average make a 2.3% return in December, with the numbers going back to 1984. It makes the final month of the year the best for investors.
This week, Jason Hollands at Bestinvest ran the same numbers for global markets through the MSCI World index and found the same pattern. On average over the past 50 years stocks have risen in 74% of Decembers, easily the most consistently profitable month.
The reasons for why this may occur vary and all could have some truth behind them. One thought is that the holidays and end of year mood tend to be one of cheer, so investors are in more of a buying temperament.
Another less jolly option is fund managers are coming towards the end of their year’s performance period and therefore need markets to rise to get their bonuses. This could also explain why January is usually a poorer month (they’ve made the performance numbers, so who cares?).
A third option is from the world of hedge funds, who may have to close out short positions by the end of the year by buying back the shares they loaned out.
So investors should bank on a pretty solid month, right? Well not so fast. The problem with using an average is that there will be years where it doesn’t work. That was the case last year, when the FTSE 100 made a loss of 1.5%.
In fact, 2022 was the sixth worst December of the past 39 years and only the eighth where the index made a loss, new data from AJ Bell has shown.
‘Okay great, but what are the chances it’ll fail twice in a row’ I hear you say. Well it is possible for there to be two back to back years where the FTSE 100 makes negative returns in December. It has happened twice before: the first was in 1985/86 and the second was in 2014/15.
However, excluding these, in the December after the market records a loss in the final month of the previous year, the FTSE 100 has made an average gain of 3.9%.
Should you fire in money now to make the most of it? Well remember that January is typically one of the worst months for equities, as is February, so timing will be key.
And there is no guarantee that the Santa rally will work this year, even if statistically the odds may be in its favour. Perhaps the best option is to do nothing, remain invested, and be pleasantly surprised if we have another strong month. If it goes well, maybe treat yourself or your loved ones to an extra present or two. If the market doesn’t rally, at least you didn’t bet it all on a saying.