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Is the stock market ‘Santa Rally’ coming to town for investors in 2023?

Is the stock market ‘Santa Rally’ coming to town for investors in 2023?
Paloma Kubiak
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Paloma Kubiak

The countdown to Christmas has started, with the festive period traditionally a time when investors hold out for the stock market ‘Santa Rally’. But will it be a boom or bust end to 2023?

We’re in the first week of December, which reignites speculation around the fabled ‘Santa Rally’ where stock markets tend to enjoy a seasonal uplift to year-end.

Whether it’s down to festive cheer, lower trade volumes, fund managers attempting to make their numbers ahead of bonus season or investors anticipating the ‘January effect’ where money is put to work at the start of the New Year, the real question is, will 2023 end on a high?

According to Russ Mould, AJ Bell investment director, December is easily the best-performing month over time.

He explained that since its launch in 1984, the FTSE 100 index has gained 2.2% on average in December, whereas April and July are the only other months to offer 1% or more.

A look over historical data reveals the FTSE index has fallen just eight times in December since 1984, and five times since the turn of the century.

However, Mould explained that the ‘Santa Rally’ does not seem to be a reliable indicator for the following year.

There have been 11 annual losses since 1984, with 10 of them coming directly after a gain in December of the previous year. The only exception was 2015 which recorded a 4.9% annual decline after a 2.3% drop in December 2014.

Mould said: “If anything, some of the best Decembers 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.

“By contrast, some grim Christmases – 1985, 1990, 1994, 2002 and 2018 – have been followed by cheerful years.”

He added that for 2023, the jury is still out. “December 2022 yielded a lump of coal in the form of a 1.6% drop, and so far, the FTSE 100 is down 0.4% in 2023.”

This neutral position is also shared by Jason Hollands, managing director of Bestinvest, who said while the evidence of a Santa Rally is “quite compelling, there’s no guarantee that this year will see the pattern play out”.

However, he said: “The widely-predicted recession did not arrive, inflation has slowed significantly, and interest rates appear to have peaked. Despite these pressures, company earnings have proven resilient.

“That said, the global outlook is finely balanced as economic growth is expected to slow as the lagged effect of one of the most aggressive cycles of interest rate rises in decades bites and it is notable that most forecasters appear to be shying away from bold predictions for the year ahead.  2024 also brings political uncertainties with a significant number of elections taking place, including a potential General Election in the UK and the US Presidential elections. ”

‘Momentum set to continue’

Nigel Green, CEO of independent financial advisory deVere Group is bullish on the prospect of a year-end rally, following an impressive November.

On Wall Street, the S&P 500 gained 8.9% last month, which is the second-best November since 1980. Meanwhile, in London, the FTSE had its best month in 2023. Further, MSCI’s world stock index closed the month up almost 9%, its best performance since November 2020.

Green said: “After November’s impressive run, we now expect the momentum to continue. It’s likely we’ll see markets experience a Santa Rally taking us to the end of 2023.

“We would attribute a surge in stocks due to a plummet in bond yields that’s been triggered by increasing signals that central banks, including the Federal Reserve, the Bank of England and the European Central Bank, among others, are done for now with their rate hiking agendas.”

Meanwhile, Tom Stevenson, investment director for personal investing at Fidelity International, said: “While market superstitions and seasonal adages are rightly viewed with a hint of scepticism, the ‘Santa Rally’ appears to be the gift that just keeps on giving. According to our analysis, December has unwrapped positive returns on 80% of occasions for the FTSE 100, and 77% for the S&P 500 – making it a time of the year when investors can hope for an early Christmas present.”

But he cautioned: “Attempting to time the market, especially on the basis of past performance, carries a lot of risk. A more sensible investment strategy is to remain invested through the market cycles, save regularly, and ensure diversification across different asset classes and geographies.”

Where are the opportunities for investors?

While Green emphasises that “diversification remains a cornerstone of effective portfolio management”, he said with the possibility of a Santa Rally, the focus shifts towards sectors poised for growth in the wake of improved market sentiment.

“Tech, renewable energy, and healthcare are sectors that could benefit from the expected surge, providing investors with opportunities for capital appreciation,” Green said.