Do you believe in Santa? thumbnail

Do you believe in Santa?

Well not actually Santa Claus himself (as he does exist of course), but the phenomenon of the ˜Santa rally, i.e. the propensity of the stock market to rise in the month of December.

As we approach the Christmas season, we see widespread use of this term in the financial press to explain rises in the stock market, just as we typically see articles in late April referring to the old adage of ˜Sell in May and go away, return again on St Leger Day. However, whilst the statistics supporting that four-and-a-bit month hiatus from the market are inconclusive, evidence of a recurring Santa rally does appear to have some substance to it.

Having done some number-crunching for the recent past, looking at market data from 1996, there is a very clear trend of the market rising over the month of December. The trend is evident for both the FTSE-100 and the wider FTSE All-Share indices, with both rising in 17 years out of 18, and recording an average gain of 2.4%. The odd year out was 2002, when the FTSE-100 fell by a whopping 5.5% in December (to make a fall of 25% for the year) as markets contended with fears of war in Iraq, tensions in North Korea, corporate accounting scandals and economic stagnation (any of these sound vaguely familiar by the way?!).

What is unclear is why this trend should be quite so consistent when financial markets are supposed to be efficient and rational and the economic backdrop has differed markedly in many of these years. An often suggested reason is that investment managers seek to deploy cash holdings into the market to push up prices, especially during the otherwise thinly-traded market conditions prevalent over Christmas and the New Year.

Whilst this would seem to be a contributing factor, it could also be argued that the ˜Santa rally is, to some extent, becoming self-fulfilling. Studies into behavioural finance show that investors decision-making is influenced by a range of biases, with individuals subconsciously using mental ˜rules of thumb in order to help them make investment decisions. With markets historically having risen more often than not in December, it may be that investors are using this information (consciously or subconsciously) as a deciding factor in whether to invest or not.

Whether this trend continues in 2014, we will just have to wait and see. Markets have faced a difficult and volatile September / October period as global economic growth forecasts edged down, adding to a raft of geopolitical concerns that have been rumbling in the background for much of the year. We are, however, still hopeful that Santa (and his elves) will weave their magic again and that markets will have a positive finish to the year!

We at Cave & Sons wish you all a very Merry Christmas and a prosperous New Year.

If you would like to discuss your investment strategy or personal financial plans with a free initial, no obligation, meeting then please contact Cave & Sons Northampton head office on (01604) 621421 or email enquiries@caves.co.uk.

Cave & Sons Ltd is authorised and regulated by the Financial Conduct Authority. FCA number 143715