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Santa rally ahead?

November 2018

It’s a festive tradition to discuss the prospects for a ‘Santa rally’ – will markets deliver this year?  

  • A Santa rally has happened 84% of the time.
  • Bestinvest research shows the Santa rally was strongest in emerging markets.
  • There is a lot that may still deter Santa this year, from trade wars to rising US interest rates.

It seems that at this time of year there are two choices: to talk about Brexit or to discuss the merits of a Santa rally. With Brexit, no one knows what is going on, and nothing will be clear until after the vote on the 11th December, and probably not then either. So the Santa rally it is. Tradition is tradition.

Unlike ‘Sell in May and go away’, the Santa rally has a much firmer footing. Nothing is certain in stock markets, but there has been a rally in the run-up to Christmas 84% of the time. This has been attributed to everything from ‘seasonal cheerfulness’, to lower trading volumes, to fund managers trying to make their numbers ahead of bonus season. It may even be that the Santa rally is now such popular folklore than it is self-perpetuating. 

Research by Interactive Investor shows that taking the December low of the FTSE 100 in the years back to 1998, and then comparing them to the high over the remainder of the month (as opposed to looking at the calendar month between the 1st and the 31st), the “Santa Rally” happened every year – without exception. It also tends to peak between Christmas and New Year when trading volumes are thin. 

While no-one is going to get rich - the average gain is 5.8% - some markets fare better than others. Bestinvest research shows the Santa Rally was strongest in emerging markets. After being thoroughly beaten up for the rest of the year, this would be a welcome reprieve for emerging market investors. However, there is a lot that may still deter Santa this year, from trade wars to rising US interest rates. 

However, Laith Khalaf, senior analyst at Hargreaves Lansdown adds a sobering thought to all this Santa rally excitement. He points out that had investors only invested in December for the last 32 years would have netted a return of 128% - meaning £10,000 would have grown to £22,762. But investors had held all year round, they’d be sitting on £191,195. Admittedly, skipping December completely would have cost £107,197, but it does illustrate the dangers of market timing. 

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