The Santa Rally
At this time of year we often hear about a so-called Santa rally affecting stock markets in December. So, what is the Santa rally, and when exactly does it occur?
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What is a Santa rally?
As the name implies, a Santa rally is the term for when stock markets post positive results in the run up to Christmas and New Year and there’s strong evidence that it exists.
For example, investors in the UK investors, have come to expect the FTSE 100 to achieve a good return in December. Analysis by IG shows that from 1985 to 2015, the FTSE has made an average gain of 2.26% in the last month of the year, rising in value 83% of the time.
And it isn’t just the FTSE that can benefit from a Santa rally. Whilst talk of a Santa rally tends to focus om markets in the US, stock indices around the world are potentially affected.
What causes a Santa rally?
It’s not quite clear why this phenomenon occurs, and the reality is that there are probably several factors behind each one individually. But a few of the major theories put forward by IG on why markets rally in December include:
- Seasonal goodwill among investors, who are more willing to buy around Christmas
- Markets rising on lower volumes over the holiday period
- Fund managers rebalancing their portfolios before the end of the year
- People investing their Christmas bonuses
- Bargain hunting before stock prices rise in January (known as the January effect)
However, the biggest cause of a Santa rally may well be in the mind so to speak. In other words, the psychology of the markets themselves. If indices post gains in December, people assume a Santa rally is on the cards and buy accordingly which in turn leads to further gains.
When does a Santa rally start?
Interestingly, there is no agreement about when Santa rallies really start, with different sources offering conflicting answers. Does it last the whole of December, just the week before Christmas, or something in between?
IG have done their own analysis, looking at every possible combination of time period on the FTSE and S&P from 1986-2015. They found that the biggest rises in both indices typically occur from 14th, 15th and 16th December. Overall, investing from these dates brought an average annual return of 2.53%, and a positive return 87% of the time. Ironically, investing over the first half of the month yielded an average loss of -0.23%.
While you can get a broad idea of when a Santa rally might start by looking at historical data, each year’s Santa rally will be different. It might start early, it might start late, or it might not start at all. You can only know for sure if a Santa rally has taken place once it is already over.
What does the Santa rally mean for you?
Historically Santa rallies tend to have the most impact on major indices, and as such will affect your money invested in your Pension Funds and ISA investments.
But how have other world events such as Coronavirus, the US Election and Brexit affected them?
Contact us for an independent, regulated free review of your pension or ISA investments today.
Contact the team through firstname.lastname@example.org with the subject ‘Santa Rally’ and we will get in touch with you in the near future to further assist.
The value of investments can go down as well as up and you may not get back the full amount you invested.
The past is not a guide to future performance and past performance may not necessarily be repeated.
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