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Will Santa pay a visit to stock markets this month?

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The weeks leading up to Christmas are often the most buoyant for stock markets. Should investors participate?

What could be more festive than a ‘Santa Rally’? This is not, as it might sound, a competitive Lapland sleigh race, but a stock market phenomenon whereby there is a surge in stock prices in the weeks leading up to Christmas and New Year.

Some people take it to be the whole month of December – or even from September to the end of December. It has its roots in the US, and Adrian Lowcock, investment director at Architas, says it is one of the more “statistically robust” trends. In December the stock market tends to rise gently in the first couple of weeks of the month before the Santa Rally takes hold and then it rises strongly in the last two weeks of the year.

He points that the last two weeks of the year have historically been the strongest two week period of the whole year. Since 1984 the FTSE 100 index, excluding dividends, has risen by an average of 2.5% during December. It has fallen six times out of 33 during December with the index falling 2.3% in December 2014 and 1.79% in December 2015.

Why does it happen?

Jason Hollands, managing director at Tilney Group, says: “The reasons why the markets have a tendency to end the year on a high are a source of much debate. Optimism about end of year bonuses and general Christmas cheer driving markets higher seem a little tenuous, with more technical theories suggesting that momentum in the markets may be down to fund managers “window dressing” their portfolios with stocks that have performed well and reducing cash weightings ahead of reporting periods to clients.

“Another factor could be hedge funds closing down short positions that have not played out as expected, forcing them to buy back shares and return them to the institutions who lent the shares to them.”

Hollands says the current market mood could see it happening again this year: “With stock markets currently riding high and market volatility as calm as a duck pond, there is every possibility of yet another good month this December.”

However, others add a note of caution. In particular, markets have headed higher – almost uninterrupted for eight years, and many are concerned that they are long overdue a sell-off. Lowcock says: “As the data shows the rally is by no means guaranteed and for the first time in 30 years it hasn’t materialised for the two years in a row. In addition just investing for the Santa Rally is not a particularly successful investment strategy as investors would have missed out on over 90% of the returns from the FTSE 100.”

The dangers of timing the market

Darius McDermott, managing director of Chelsea Financial Services, also says chasing the Santa Rally may not be the best option: “Our view is that investors need to ignore analogies and simply build a balanced portfolio for the long-term, reviewing it a couple of times a year to make sure it is on track to achieve their investment goals.

“Data can generally be produced to support any argument – for and against. We’d suggest that, in the main, there is no evidence that any one seasonal trend works every time and in most cases, is wrong as often as it is right…Trying to time the market is dangerous. If you get it right, great, but if you get it wrong you could lose a lot or gain a lot less than if you simply stayed put.”

That said, if investors wanted to take advantage, where should they be looking? Hollands urges caution on the US markets, where expectations of significant tax cuts have been partially factored into rising US share prices, where valuations appear expensive. If these tax cuts are forthcoming, it could take the wind out of the sails for US equities.

He suggests investors re-look at the UK, Europe and emerging markets: “UK equities appear fair value and continue to offer attractive dividend yields, the outlook for European companies is positive with strong earnings momentum and for value hunters global emerging market shares are still trading well below longer term trend despite a strong year of share price returns.”

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