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Can investors expect a stock market ‘Santa rally’ in 2020?

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It’s the first week of December and it wouldn’t be Christmas without the annual discussion of whether the stock market ‘Santa rally’ will take place this year.

Stock markets typically enjoy a seasonal uplift in December which has been coined as the ‘Santa rally’.

It has been attributed to everything from ‘seasonal cheerfulness’, to lower trading volumes, to fund managers trying to make their numbers ahead of bonus season and the anticipation of the ‘January effect’ where investor money is put to work at the start of the New Year.

Since its launch in 1984, the FTSE 100 index has gained 2.2% on average in December, whereas April is the only other month to offer an average advance of more than 1%, according to Russ Mould, investment director at AJ Bell.

He says: “The FTSE index has fallen just seven times in December since 1984 and only five times since 2000. It has served up 11 annual losses since 1984 and ten of those came after a gain in the December of the previous year – the only exception was 2015, where the 4.9% annual decline came after a 2.3% slide in December 2014.”

However, he warns that some of the best Decembers for investors have led to “the most treacherous subsequent years”.

“A buoyant festive season in 1993 was followed by 1994’s Fed rate rise shock, 1989’s knees-up let investors stumble into a recession and a bear market, while 1999’s party led to the hangover that came with the collapse of the technology bubble in 2000,” he says.

Mould adds: “By contrast, some grim Christmases – 1985, 1990, 1994, 2002 and even 2018 – have been followed by cheerful years. Only one of the seven December drops in the FTSE 100 has set a trend for the following year, and that was 2014, when even then the UK’s leading index shed just 4.9% of its value in 2015.”

Can investors expect a ‘Santa rally’ this December 2020?

This year has been anything but normal with the underlying Brexit no deal scenario and the global damage caused by the coronavirus pandemic.

Many will question whether the typical seasonal uplift will return this year. But on Tuesday 1 December, the FTSE 100 gained near 2%, adding hope that despite the difficult backdrop, markets can deliver for investors.

Jason Hollands, managing director of Bestinvest, says with the recent positive news of an effective vaccine, this has injected some pre-Christmas cheer into the stock market as investors eye a rebound in the economy next year, and better times ahead.

He adds: “It will be interesting to see what happens this December, which could be a really notable one for the UK market depending on whether a trade deal is reached with the EU over the coming days and weeks.

“The UK stock market has quite high exposure compared to other markets to some of areas hardest hit by the pandemic, such as energy and financial services. If global investor confidence grows that the end of the pandemic is in sight, and post-Brexit trade uncertainties substantially lift, it could bring renewed interest in UK shares for their recovery potential.”

Mould adds: “The Santa rally is not certain to offer anything more than festive cheer. It does not seem to be a reliable indicator for the coming year.”

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