As the year winds down, investors are keeping an eye on whether the so-called Santa rally — the seasonal surge in stock market performance — will once again bring some festive cheer. Traditionally, markets tend to see gains between the first trading session after Christmas and the second session of the New Year.
According to data from Bestinvest, this phenomenon is far from a myth. December boasts the highest frequency of positive returns of any month, with shares rising 74% of the time, a higher rate than at any other time.
“We have found compelling evidence to support the idea of a ‘Santa Rally’,” said Jason Hollands, managing director at Bestinvest.
Looking at broader market performance, 2024 has been a strong year for many major stock indices. As of December 6, the MSCI World Index (990100) of global equities had returned 23.9% in total (in GBP), while the S&P 500 (^GSPC) saw a gain of 29.4%, largely driven by enthusiasm around artificial intelligence.
The UK market, despite facing some challenges, delivered an 11.1% return (MSCI United Kingdom All Cap Index), while China’s market rebounded with a 19.7% return (MSCI China Index) thanks to increased stimulus measures. Europe, however, has struggled, with the MSCI Europe ex UK Index posting a 6% return.
“Explanations as to why stock markets tend to do well in December include the markets getting a boost as fund managers from the City of London to Wall Street position for the year ahead, investing any spare cash in their funds to ‘window dress’ their portfolios ahead of reporting periods,” Hollands added.
“Another is that hedge funds which take negative bets on companies – known as ‘short positions’ – close out some of these positions before the year end. This requires them to repurchase shares that they previously have borrowed off other investors in order to sell them, before returning the shares to the stock lender.”
Despite December’s strong historical performance, Hollands cautioned against relying solely on seasonal trends.
“While December is often a strong month for equities, there is no guarantee it will be the case this year,” he said. “It’s crucial to invest with a long-term horizon in mind. For newcomers to investing, drip-feeding money into the market monthly can help alleviate the stress of market volatility.”
Research from Fidelity International supports the idea of a festive market uplift, with both the FTSE 100 (^FTSE) and S&P 500 benefiting from the seasonal surge last December. Over the past 30 years, the FTSE 100 has delivered positive returns in December 24 times, while the S&P 500 has posted gains 23 times in the same period.
Ed Monk, associate director for personal investing at Fidelity, said: “Market superstitions and seasonal adages are rightly viewed with a hint of scepticism. That said, the ‘Santa Rally’ does seem to be the gift that keeps giving – most years at least.
“December 2023 brought good tidings on both sides of the Atlantic after a Grinch-like 2022. This year is anyone’s guess, with the Trump Trade adding momentum to US shares but weighing on markets elsewhere”
Monk pointed to several potential reasons for the December rally, including thin trading volumes around Christmas, increased contributions from Christmas bonuses, and the natural tendency for markets to rise more frequently than they fall.
He also cautioned against trying to time the market based on past performance, advising a more sensible strategy of regular saving and diversification across asset classes.
eToro’s analysis of 14 major global stock indices shows that December returns are historically strong across the world. The platform found that, on average, returns in December are 1.63%, higher than the average monthly return of 0.57% from January to November. December, thanks to the Santa rally, typically accounts for 23% of the annual returns for these indices.
Sam North, an analyst at eToro, highlighted the importance of staying invested to capture the benefits of the December rally. “Although past performance is never a guarantee of future returns, December has historically been a standout month for global stock markets with the so-called Santa rally delivering the goods, and this is particularly true for UK investors.”
Among the 14 indices analysed, Hong Kong’s Hang Seng Index (^HSI) has been the best performer, with an average December return of 3.1%, more than triple its average monthly return of 0.95%. The UK’s FTSE 100 also stands out, with December delivering an average return of 2.29%, making up 36% of the index’s yearly performance. Japan’s Nikkei 225 (^N225) follows closely, posting an average December return of 1.98%, while the FTSE 250 (^FTMC) has outperformed with an average return of 2.71%.
However, not all indices see a boost. Spain’s IBEX 35 (^IBEX) has historically underperformed in December, with returns falling 0.14% below the average for the rest of the year. That said, even Australia’s ASX 200 (^AXJO) shows a strong seasonal rally, with an average December return of 1.36%.
North added: “What’s clear from the data is that the Santa rally is far more generous in some parts of the world, with the UK a standout for festive returns.
“These regional quirks are a reminder that there isn’t a one-size-fits-all approach to global markets and savvy investors should keep an eye on local dynamics to make the most of the season.”
Not everyone is convinced by the idea of a Santa rally. Ben Kumar, investment director at 7IM, pointed out that, historically, December isn’t particularly special when viewed in a long-term context.
“Of course, we should note 60% of ALL months since 1930 deliver positive returns through history. So investing in any month from start to finish gives you better odds than a coin flip of being positive – except for Sad September where returns are positive just 45% of the time,” Kumar said.
He added: “Despite the seasonal excitement, we believe the Santa rally is just another Christmas fairy tale. The key to investing success remains a long-term strategy, not betting on short-term market quirks.”
Richard Hunter, head of markets at Interactive Investor, said: “In the UK, any Santa rally remains notable by its absence.”
While the Santa rally is an established trend in many markets, there are no guarantees that it will continue this year.
Global stock markets have generally had a strong 2024, but seasonal trends should not be the sole basis for investment decisions. Investors should focus on long-term goals rather than relying on the brief December uptick.
As the year draws to a close, the Santa rally may or may not make an appearance, but for those with a long-term view, it is just one of many seasonal patterns in the complex dance of global markets.
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