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In years gone by there were fundamental reasons why the major equity indices, such as the FTSE, had a tendency to rise over the month of December. The last quarter of the year saw those fund managers who had reduced their investment exposure over the summer months reduce the cash on their books while topping up equity exposure.
The seasonality of traders' patterns has become less clear cut over the years. The ability to trade and manage positions while on the move or away from the desk has seen the fall off in volumes being less affected by traditionally quiet periods. On top of the increased ability to trade on the move, the propensity for more global dealing teams negating the historical issues of bank holidays has also helped reduce their impact.
Last December, the DAX, FTSE and S&P 500 all sold off – an event that had not happened in the preceding decade. Was last year a one off, the exception to the rule or a sign that the month of December shouldn’t be relied upon for equity returns?
Over the last decade the FTSE has averaged a 2.21% positive return and the DAX has been even more generous with an average 2.29% return – even though it had negative returns both last year and in 2011. The most miserly of the bunch is the S&P 500 with an average return of 1.29% and three negative years, 2014, 2007 and 2005.
So what should we expect in December 2015? The European Central Bank might have increased the stimulus to the market but has undershot expectations and subsequently dented investor confidence.
This could well be a template that is replicated when the Fed chair, Janet Yellen, finally announces on 16 December if the beginning of the US interest rate normalisation process is under way. If the decision is to increase the rate by only a nominal amount well below 25 basis points this might see investors spooked, worrying that the Federal Reserve doesn’t believe the US economy is strongly enough positioned to handle a greater increase.
A case of good news not quite being good enough and ultimately being viewed as bad.