Santa rally: is it real?

Rob Morgan looks at whether there really is a tendency for markets to rise during the festive period.

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  1. Rob Morgan

The ‘Santa Rally’ is a stock market superstition that associates the latter part of the trading year with stock market gains. Some say it is down to traders investing their Christmas bonuses or increased trading activity caused by the US tax year end.

Others have suggested it could be window dressing on the part of fund managers filling their portfolios with the year’s successful shares. Or perhaps it is just a self-fulfilling prophecy.

Interestingly, the phenomenon does stand up to scrutiny. I looked at the returns of the UK’s FTSE 100 and the US S&P 500 in the month of December over the past 20 years to see how often stock market gains occurred. For both markets December has produced positive returns in 17 out of 20 years, suggesting that the Santa Rally could be a genuine seasonal effect.

Table: % returns in the month of December from the FTSE 100 and S&P 500.

Source: FE Analytics, total return in local currency with net income reinvested.

With markets volatile, and ultimately making little progress this year, there would seem to be scope for some seasonal good cheer this December. However, it would be unwise to base any investment strategy on this or any other stock market adage. Trying to time the market to play short-term trends can have expensive consequences if you get it wrong. In 2002, for instance, the stock market fell heavily over the course of December.

Instead, it is probably better to invest for the longer term, stick to your longer term strategy, save regularly and diversify across asset classes and geographies so your eggs are not all in one basket. A selection of investments with the ability to perform differently should help to smooth out performance.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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