Archived article: This article was correct at the time of publishing. Tax, investments and pension rules can change over time so the information below may not be current.

Will a Santa Rally make 2017 a record year of consecutive monthly gains?

As we enter the festive season, the key question from an investment perspective is how much longer the partying will continue to go on. 2017 has already shaped up to be an incredible year of double-digit returns across most stock markets. Significantly, if the S&P 500 index ends the week delivering a positive total return for November, this will represent a record-breaking streak of 13 consecutive months of positive returns – the longest unbroken run of consistent gains across 90 years of data.

Jason Hollands Jason Hollands
29 November 2017

Will we see a Santa Rally?

Could 2017 be the year when every single month went well for investors? It is certainly a tantalising possibility and one which observers of seasonal trends in stock markets might have good reason to feel optimistic about. That’s because of a phenomenon known as the Santa Rally, whereby markets have a high incidence of delivering positive returns during December.

Positive returns for the UK and US stock markets

We looked at the performance of the UK stock market over the last 30 years, and found positive total returns in December a staggering 87% of the time. Of the four years where the stock market produced a negative return, only one year (2002) saw a loss of more than 5%. In contrast, there have been seven separate occasions where the stock market posted stellar total returns of over 5%, with 1993 posting the best return of 8.24%.

The S&P 500 has similarly posted a positive return in December 83% of the time over the past 30 years, with only 2002 delivering a negative return of more than 5%. Its strongest year was 1991 where it posted a barnstorming 11.44%.

What causes a Santa Rally?

Statistically speaking, the Santa Rally is a very convincing phenomenon although 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.

More technical theories suggest 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.

There are potential upsets

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, there are some potential upsets to this cheery scenario that investors must be aware of.

These include another nuclear test by North Korea or a major setback in the planned overhaul of the US tax code, which President Trump and Republican Congressional leaders hope to achieve by Christmas.

Optimism about US tax cuts is high but this is contingent on a handful of Republican Senators who have yet to commit to support the legislation. Significant tax cuts are a cornerstone of President Trump’s pro-growth agenda and expectations of these have been partially factored into spiralling US share prices, where valuations appear expensive on most measures. A failure to deliver in this area could take the wind out of the sails for US equities.

However, it is worth remembering that it is nigh impossible to predict short-term market setbacks, and a better idea is for investors to stay focused on their long-term objectives.

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Important information

Source: Lipper for Investment Management, 29/11/2017.