Santa Rally or Christmas Turkey?

The FTSE-100 was up over 1 per cent on the first working day of December 2018.

Donald Maxwell-Scott is Technical Investment Manager at Rowan Dartington

Some would point out that this indicates that we are at the start of the so-called Santa Rally. However, in our opinion the strong start to December should be attributed to Donald Trump and Xi Jinping, and the cooling rhetoric between the two and their on-going (although temporally suspended) trade war.

Some may not believe in Santa and therefore be sceptical of his potential to inspire a rally. But looking at the performance of the FTSE 100 in December over the last 10 years, there is some statistical merit in the legendary rally. What is less clear is the reasoning behind the phenomena.

Sign up to our Business newsletter

Sign up to our Business newsletter

Some used to say it was stockbrokers and fund managers ‘window dressing’ their holdings with stocks that have performed well. Some argue that it is people investing their Christmas bonus, whilst others believe that it is simply the more optimistic and bullish retail investor exerting their influence on the market while the institutional investors are away on their holidays.

Another theory is that the increased spending over the festive season gives a welcome boost to companies and their subsequent earnings. However, we don’t believe events like the recent Black Friday contribute to a Santa Rally. Queuing up outside a retail store and trampling over your fellow shoppers while simultaneously grabbing the last flat screen TV does not resonate with an enjoyable

day out shopping to us.

So, what has ‘Santa’ delivered over the last 10 years? If you invested £100,000 in the FTSE-100 on December 1 in 2007 and remained invested until Christmas Eve of that year, and then repeated this process for the next nine years, then the £100,000 would now have grown to £125,405.

A return of over 25 per cent on your original investment is quite remarkable given that you would remain uninvested for the other 11 months of the year.

Of course, another adage that everyone is familiar with is that ‘time in the market is better than timing the market’. This also proves correct that your original £100,000 investment would now be worth £172,340 if you had left the money in the market (FTSE 100) from December 1, 2007 to December 1, 2017. However, while your return is superior, your money will have been invested for 120 months, so an average monthly return of 0.6per cent, which, when compared to 10 months and an average of over 2.5 per cent, shows that December has been very rewarding in the stock market.

The most rewarding December in the last ten years was in 2010, when the FTSE 100 moved up by 6.5 per cent. Overall, December was positive in eight out of the ten years between 2007 and 2017. While the Santa Rally might be a statistical phenomenon and certainly shows that over a prolonged period of time there is some truth to it, it does not mean investors should rush out and invest in the stock market.

So, whilst history does show us that Santa and his rally may indeed exist, the continued geopolitical uncertainty suggests that we could be dealing with more of a Christmas Turkey than soaring markets. However, the optimistic reader will point out that even turkeys can sometimes fly.