The ‘Santa rally’ describes the tendency for sustained increases in the stock market that happen in the last month (or two) of the year. Daniel Grote, for
New Model Adviser, reports that this tradition appears to have started in earnest in the US. Grote explains that “bullish investors are on the front foot” and this is due to two announcements.
In October 2018, Federal Reserve chair Jerome Powell claimed interest rates were “just below” neutral, and Grote reports that this suggested the US was “nearing the end of its interest rate hiking cycle”. This sparked a jump in stock markets, as described in another article by
New Model Adviser, dated 30 November 2018, that Grote links to. It reports that stock markets were “up 4.2% over the five trading days to yesterday in pound terms”.
In addition to this, on 1 December 2018, the US announced that it had reached a 90-day truce with China, halting additional tariffs – President Donald Trump said he will leave the tariffs on US$200bn worth of product at the 10% rate, and not raise it to 25% at this time. Grote reports that the Santa rally accelerated on 3 December after this announcement.
Grote says the stock markets are set to continue their habit of “good cheer over the Christmas period”, and uses statistics from online stockbroker Bestinvest, which reports that since 1979 the global markets have risen 77% of the time in December, with a median return of 1.3%.
In the UK, this trend is more distinct, according to Bestinvest. The FTSE 100 has risen 79% of the time since December 1979, with a median return of 2.4%. According to figures from investment management company Fidelity, the FTSE 100 has only fallen four years out of 30 – in 1994, 2002, 2014 and 2015. Although, Grote points out that on 11 December, MPs will vote on Prime Minister Theresa May’s Brexit deal, which could impact the UK stock market and the pound.
Grote quotes Bestinvest managing director Jason Hollands, who says the Santa rally is a “convincing phenomenon”, but says it isn’t clear why the markets rise in the final month of the year. “One theory is that year-end positive momentum in the markets may be down to fund managers reducing their cash weightings and ‘window dressing’ their portfolios with stocks that have performed well, ahead of reporting periods to clients in the new year,” says Hollands.
New Model Adviser article Wall Street predictions Christmas on Wall Street could prove fruitful in the Santa rally, according to Tyler Clifford for CNBC. Clifford quotes an interview with John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, which was broadcast on CNBC’s post-market talk show,
Fast Money. Stoltzfus predicts that Wall Street could “get 7% out of it” and said that consumer discretionary stocks are “in a position to do well through the end of the year”.
In the interview, Stoltzfus explains that technology stocks could lead the way, due to their innovative nature. “The changes [in technology] are so dramatic in the way companies deal with other companies, the way they deal with their customers, the way customers deal with companies,” Stoltzfus says. “And now medicine is [soon] to be distributed, you know, by smartphones.”
Clifford reports that the Nasdaq Composite index rose by 1.5% on 3 December, after only gaining 0.3% in the month of November. He points to Amazon and Apple, whose share prices increased 4.9% and 3.5% respectively on 3 December, as drivers of this jump in the index.
CNBC article
Do you believe in Santa?Although the reasons for the Santa rally phenomenon aren’t crystal clear, there is statistical evidence to prove its existence. Harvey Jones, for UAE newspaper
The National, puts forward the case for the annual Santa rally with testament and data from finance experts from the UK and further afield.
Jones uses data from wealth manager Brewin Dolphin, based on the FTSE 100, which shows that in 25 years out of the past 34, the final two months of the year have outperformed the rest of the year. On average, the FTSE 100 grew 1.43% in November and December, in comparison to an average of 0.41% over January to October. Alisdair Ronald, senior investment manage at Brewin Dolphin, says that this increase could be down to festive cheer, tax planning and annual bonuses.
Chris Beauchamp, chief market analyst at online trading platform IG, agrees that the Santa rally could be a seasonal factor, noting the traditional “pre-Thanksgiving bounce in equities”.
Vijay Valecha, chief market analyst at Century Financial Brokers in Dubai, expects US consumers to be spending liberally this month due to unemployment levels dropping to 3.7% and consumer confidence at an almost 18-year high.
However, Gordon Robertson, director of financial advisory group InvestMe Financial Services in Dubai, warns that the Federal Reserve interest rates might impact the Santa rally. Jones explains that higher interest rates in the US could drive up business and borrowing costs and consumers will have “less in their pockets” after paying more for credit such as mortgages.
The National article
It appears that the Santa rally is coming to town, if previous data is anything to go by, in both the UK and the US. However, Santa’s sack might not be as full this year, thanks to factors such as high interest rates and uncertainty created by geopolitical events such as US trade tariffs and Brexit negotiations.
Seen a blog, news story or discussion online that you think might interest CISI members? Email bethan.rees@wardour.co.uk.