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Will there be a Santa rally this year?

Tahmina Mannan
Written By:
Tahmina Mannan
Posted:
Updated:
16/12/2013

December is one of the best months for stock market gains. But after a bumper run for equities, will this year be any different?

A ‘Santa rally’ is a surge in share prices which often occurs in December.

Historically, December is the strongest month of the year; since 1984 the FTSE 100 index has increased on average by 2.5% over the month.

In fact in the 28 years since the FTSE 100 was launched it has only fallen four times in December, the last time being 2002.

Most of the rises tend to occur in the second half of the month – hence the Santa rally tag.

There are a number of possible explanations for the cause of the phenomenon – some say it is because fund managers reposition their portfolios ahead of the end of the year, while others put it down to seasonal cheer or people investing their Christmas bonuses.

There is also a tendency for markets to correct themselves in September and October, as traders return after the quieter summer months, after which markets go on to do better in the winter as investors regain their confidence.

So, can investors expect a Santa rally this December?

While investors in bonds and cash have struggled to make a real return this year, 2013 has been more rewarding for equity investors. The FTSE 100 is up 14% to the beginning of December, its best run since 2009.

But the possibility of the US tapering its quantitiative easing (QE) programme – a move that could be imminent – is dulling sentiment.

In recent weeks markets have been in a state of limbo, with the FTSE 100 falling to a two month low, over whether the Fed will announce the start of tapering on 18 December during its last meeting of the year.

Investor concerns over how tapering will affect their investments is understandable, considering that the hint of tapering by departing Federal Reserve boss, Ben Bernanke, in May sent the FTSE 100 spiralling from 6,875 to 6,029 in less than a month.

But experts say the likelihood of a US taper before the year is out is unlikely.

Russ Koesterich, BlackRock’s global chief investment strategist, says: “Our expectation is that while it is still possible the Fed will announce tapering of its bond purchases this month, we still feel early 2014 is a more likely timeframe.”

Keith Wade, chief economist and strategist at Schroders, expects tapering to start even later: “We expect the Fed to begin to taper its QE programme from March 2014 and to combine this move with enhanced forward guidance to reduce expectations of an early [interest] rate rise.”

Over the page: Should investors try and cash in on the Santa rally?

The Santa rally phenomenon also occurs across the pond, so those with investments in American stock markets should be well positioned to benefit from any surge in share prices.

However, the FTSE 100 tends to outperform the S&P 500 in December. In fact, December is one of the best three months of the year for the FTSE 100’s relative performance against the American stock market. It has outperformed the latter by 0.5% on average in December.

But Gary Reynolds from Courtiers Asset Management says investors should be wary of trying to cash in on this trend. “The FTSE 100 has a bit of catching up to do – it’s up 10.8% so far in 2013 compared to 26.5% for the S&P 500.

“US stocks have out-performed massively this year and we just cannot see the justification for a large UK rally versus the US, and I don’t think much will happen between now and January.”

He also says investors should be cautious of being too short-termist because there may be some unforeseen ‘nasty surprises’. He suggests investors only move investments between the US and UK markets if they have a long term goal in mind and not just to try to benefit from this year’s Santa rally. 

Reynolds adds: “I reckon everyone is breathing a sigh of relief to have got through 2013 with some decent results, so if ‘everything is coming up sunshine and Santa Claus‘ there doesn’t seem much point trying to be too clever.”

For those investors already considering early individual savings account (ISA) investments and hoping to make the most of a possible Santa rally, experts advise that investors focus on the most important factors which determine stock market performance: company profits and economic outlook.

Adrian Lowcock from Hargreaves Lansdown says: “Christmas can be a good time to sit down and review your portfolio and consider putting money to work in the market.

“Investors should continue to focus on good quality managers who can add value throughout the year and not just at Christmas. Stock pickers should be able to add significant value and help investors’ portfolios outperform over the longer term.”

 

Lowcock likes thes following stock pickers for long term investors.

Giles Hargreave

Hargreave manages a number of funds including the Marlborough UK Micro Cap Growth fund. Our analysis shows that stock selection has been the main reason for the Marlborough UK Micro Cap Growth returning 246% over five years whilst the FTSE Small Cap has returned 158%.

Nick Train/Michael Lindsell

Nick Train and Michael Lindsell manage the Lindsell Train UK Equity and Lindsell Train Global Equity funds. The managers run a concentrated portfolio of around 25-30 holdings. This approach means each holding can make a real difference to performance, although it does increase risk.