Santa Claus Rally: Despite a General Election and Brexit will Santa deliver to the UK equity markets?

WISH LIST: Investors will hope for clarity after the election.

James Andrews, Director – Head of Investment Management at Redmayne Bentley, ponders here whether the equity market will perform well during the Christmas season and into the new year.

Investors, just like some inquisitive children, are bound to ask themselves: is Santa real?

History tells us the Santa Claus Rally is indeed real, occurring in 25 of the past 30 years.

Theories abound to explain this phenomenon: trading volumes are thin due to the holiday period; fund managers tend to rebalance their portfolios heading into the new year; people investing Christmas bonuses; bargain hunting before January (which is known to be a strongly performing month); or indeed seasonal goodwill among the investing community. It is probably a confluence of all these things and somewhat of a self-fulfilling prophesy.

Last year was a rare exception, as the combination that has dogged markets throughout 2019 – Brexit and the US-China trade war – weighed on sentiment.

The FTSE 100 fell 0.5 per cent on Christmas Eve to a two-year closing low and the Dow Jones had its worst December since 1932, having fallen by around 12 per cent over the month.

This year, however, there is cause for some optimism that Santa will return.

James Andrews, Director Head of Investment Management at Redmayne Bentley,

Last week saw US stocks rising for a fourth day in a row, seeing the S&P 500 hitting 3,153, the Nasdaq Composite rising to 8,705 and the Dow Jones climbing to 28,164, with all three markets posting fresh intra-day record highs.

This was after both the recent earnings season and economic data in the US were better than expected and slowdown fears eased. Barring a dramatic escalation in the US-China trade war, the US markets look set to finish what has already been a strong year with a rally into the next.

Here in the UK, we have the small matter of a general election and the continued effects of Brexit uncertainty.

A conclusive outcome to the general election and a firm direction for Brexit are imperative so UK businesses have more certainty in terms of what future trade terms look like.

If polls are to be believed, the Conservatives are set for a majority and this would see the current Brexit deal “getting done” to use Boris Johnson’s election parlance. This should offer markets and businesses some clarity for future direction and see a rally into the new year.

Critics have pointed out that Johnson’s deadline of a trade deal with the EU by December next year is impossibly tight and, therefore, could see the re-emergence of concerns around a ‘hard’ Brexit, but I would expect markets to leave these concerns in the pile marked ‘deal with next year’.

Of nearer-term concern to investors hoping for St Nick’s market delivery is the prospect of either a hung parliament or a Labour win given Mr Corbyn’s more burdensome corporate tax rates and nationalisation standpoint.

Despite these caveats, history is on investors’ side as the momentum in the US markets will be a hard trend for the UK to buck, as will the momentum in the polls for a Conservative majority.

The good news for investors looking to play the rally is there are plenty of trading days post-election day for those prepared to jump in. Investors will be hoping both politics and Santa deliver this Christmas.

LINKS:

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