Santa Rally insights for investors this December

In the past Santa Claus has looked upon the UK stock market favourably. That’s because December has earned a reputation as a typically strong month for stock market returns – a phenomenon dubbed the ‘Santa Rally’.  

Bestinvest analysed fifty years of data for monthly returns on both global and UK equity markets (using the MSCI World and MSCI United Kingdom indices on a total return basis in GBP) to test the theory of the ‘Santa Rally’. The evidence is quite compelling, though there is no guarantee that this year will see the pattern play out.  

Is the stock market on track for a Santa Rally this year?

2023 has given investors a bumpy ride as the markets played a game of trying to second guess when interest rates will finally peak and whether economies will slip into recession or achieve the nirvana of a graceful ‘soft landing’.

At the sharp end have been the bond markets. Bonds, which are traditionally heavily held by more cautious investors, have slumped in value as interest rates have climbed higher. As the year has progressed that has proven a headwind for stock markets too, as higher borrowing costs are bad for both businesses and consumers.  

While both US and global stock market indices have delivered seemingly healthy total returns so far this year, with the MSCI World index returning 10.8% and the US S&P 500 returning 13.4%, gains have been concentrated in stocks seen as potential beneficiaries of Artificial Intelligence (particularly the ‘Magnificent Seven’ mega-cap giants: Apple, Amazon, Alphabet, Meta, Microsoft, Nvdia and Tesla).

When technology stocks are excluded, the S&P 500 return is slashed down to 1.9%. Meanwhile, the UK market has drifted sideways and at the time of writing has eked out a mere 0.9% year to-date.    

If history is anything to go by, there are reasons to be optimistic about the weeks ahead.

That’s because December has earned a reputation as a typically strong month for stock market returns - a phenomenon dubbed the ‘Santa Rally’.  

Santa Claus could rally equity markets again

As Chart A shows, when we looked at global equities, we found that over the last half-century December has the highest incidence of any month in providing investors with positive returns, with equities making gains 74% of the time, a far higher proportion than any other month.

In contrast the average month has typically seen positive returns 62% of the time. At the low end have been the months of February, June and September where the incidence of positive monthly returns has been 52% and losses have occurred 48% of the time.    

Chart A – Global equities
 

Source: Bestinvest / Lipper Investment Management. Data from November 1973 – October 2023. MSCI World Index, average monthly total returns, including dividends reinvested in Sterling.  

While December is a month when positive returns have been delivered three quarters of the time for global equities, the median actual return during the month of December from the MSCI World Index, which is comprised of more than 1,500 of the world’s largest listed companies, is +1.4%.

Particularly impressive Santa Rallies in global equities include:

Year	Return
2010	+6.8%
2008	+10.2%
1999	+6.8%
1993	5.5%
1985	7.8%
1984	5.8%

Can UK investors expect a Santa Rally?

And when it comes to the currently unloved UK stock market, as Chart B shows, the high historic success rate for the month of December was also evident, with the month delivering positive total returns a convincing 76% of the time.

However, unlike global equities where December was the month most likely to have delivered gains, in the UK market December ranked second to April where positive returns were seen 82% of the time. the median monthly UK equity return during December being +1.7% over the last fifty years (compared to +1.4% for global equities).  

Chart B – UK equities

 

 

Source: Bestinvest / Lipper Investment Management. Data from November 1973 – October 2022. MSCI United Kingdom Index, average monthly total returns, including dividends reinvested in Sterling.  

UK Santa Rallies have, on average, delivered higher returns than those experienced by global equities.

Barnstorming Santa Rallies for the MSCI UK Index were seen:

Year	Return
2017	+5.0%
2010	+6.7%
1997	+6.3%
1993	8.1%
1989	7.0%
1987	9.7%
1976	18.9%

 

Why do stocks usually see year-end gains in December?

Alongside the magic of Christmas, there are various theories as to why stock markets tend to do well in the month of December. These include the markets getting a boost as fund managers position for the year ahead, investing spare cash in their funds before the holiday break to ‘window dress’ their portfolios ahead of reporting periods. 

Another factor at play in more recent times might be hedge funds who take negative bets on companies – known as ‘short positions’ – closing out some of these positions before the year end. In practical terms this requires fund managers to re-purchase shares that they have previously borrowed off other investors and sold, to return the shares to the lender.  

Some argue that the Santa Rally may simply reflect a natural tendency towards optimism as the new year approaches.

If the latter is true, then there are some reasons to hope a Santa Rally will arrive this year and lift investor spirits. The UK market could certainly do with it. After all, 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. 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.   

If you’re thinking ahead to 2024 and beyond, you can arrange a free investment coaching session with one of our financial planners. You can get an expert review of your portfolio, discuss your investment strategy and see how Bestinvest can help you reach your goals, with no ongoing commitment.

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Source

Source for all data is MSCI World and MSCI United Kingdom indices on a total return basis in GBP unless stated otherwise.

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