WORD FROM THE CITY
The Santa Rally is a long-standing stock market superstition that does have a fair amount of statistical backing, even though there’s little rational explanation for its occurrence.
The Santa Rally sees markets rise in the run up to Christmas. The UK stock market has been positive for investors in 84 per cent of Decembers since
1986, according to Hargreaves Lansdown.
This year has seen a return to more turbulent markets, although this is more normal behaviour than the eerie calm of 2017.
The unfolding Brexit drama will undoubtedly play a part in how the stock market performs this Christmas, and this could push stock prices in either direction.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said that while December is typically a good month to be in the stock market, it’s still better to be invested for the long term rather than doing “a festive hokey-cokey with your money”.
He added: “Investors who wish to hedge their bets can simply drip feed their money into the market over a number of months, so they aren’t too reliant on Santa delivering the goods over the Christmas period.”
Since the FTSE All Share total return index was launched in 1986, 27 out of 32 Decembers (84 per cent) have seen a positive return, the highest of any month. Over the whole year the average is 62 per cent.
December also has the highest average return of 2.6 per cent, while the other months have only mustered 0.7 per cent.
It has also provided the fewest headaches to investors – it has seen the lowest maximum drawdown of any month, just 5.3 per cent in 2002.
Mr Khalaf said that if you had invested in the FTSE All Share in January 1986 you would have done better in December than in any other month. In fact, if you had only invested each December and sat the rest of the year out you would have turned £10,000 into £22,762.
However, you would be £168,433 poorer than if you had stayed in the market the whole year round, in which case you would now be sitting on £191,195.
An investor who spent December out of the market each year would have amassed just £83,998, meaning they lost out on £107,197 just from missing the last month of each year.
After December, April is the next best month for the UK stock market, rising 76 per cent of the time and recording an average return of 2.3 per cent.
Analysis from Fidelity International shows that the investors have good reason to believe in the Santa Rally.
Ed Monk, associate director for Personal Investing at Fidelity International, said: “While many stock market superstitions should be taken with a pinch of salt, our analysis shows that the ‘Santa Rally’ may be more real than Santa Claus himself, with December
December also has the highest average return of 2.6 per cent.
producing a positive return nearly nine out of ten times in the past three decades.”
He agree with Mr Khalaf that while there is plenty of evidence to suggest the Santa Rally may exist, it would be unwise to base your investment strategy on such a trivial stock market adage, or any of the other stock market superstitions for that matter.
He said that when it comes to investments, trying to time the market to take advantage of these short-term trends can have very costly consequences if you get it wrong.
It appears that it’s far better to stick to tried and tested investment principles such as investing for the long term, staying invested through the cycle, saving regularly and being well diversified across asset classes and geographies.