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As ever with financial axioms, there is some disagreement as to what period the Santa rally applies to. It is believed to have first been coined in 1972 when it specifically described the performance of stock markets in the final five days of one year and the first two days of the next.1 However, since then it has evolved to more generally describe the end-of-year strength seen across stock markets.
But does this trend bear up under scrutiny, and can it be used to help investors? At this point in 2013 markets have already risen strongly; the main US indices – S&P 500 and Dow Jones – are up by more than 20%, while in Europe the German DAX is up by 20%, leaving the FTSE 100 as the relatively poor relation, up by only 12%.2
Positive trend in December
There are various reasons that are given to try and explain the drivers of a strong end to the year for stock markets. The most common is ‘window dressing’ by fund managers, who possibly buy into the stronger performing stocks that they missed out on for much of the year. Another suggestion is that people buy ahead of yet another well-known market maxim – the January effect. Shares historically have a strong January, so the Santa rally is sometimes explained away as people getting their money into the market in anticipation of this.
Whatever the reasons – do the numbers add up?
The short answer is – yes. We have looked at the past ten years’ average performances of the FTSE 100 and the Dow Jones for the period between the end of November and the end of December, and there has clearly been a tendency for stock markets to have a positive finish to the year.