The Santa rally

It’s that time of year when the phrase ‘Santa rally’ gets rolled out by various market commentators, so why should we be any different? 

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 numbers

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. 

Chart: Monthly % change for FTSE and Dow between 30 November and 31 December
Monthly % change for FTSE and Dow between 30 November and 31 December

Since 2003 the FTSE has always ended December higher than at the close in November. It is not as clear cut for the Dow, which has incurred three negative Decembers since 2003 – although these were all drops of less than 1%. 

Percentage change between 30 November and 31 December:

Year

Dow

FTSE

2003 6.90% 3%
2004 3.40% 2.30%
2005 -0.80% 3.60%
2006 1.98% 2.80%
2007 -0.80% 0.37%
2008 -0.60% 3.40%
2009 0.81% 4.27%
2010 5.18% 6.70%
2011 1.42% 1.20%
2012 0.60% 0.52%
Average 1.81% 2.82%

 

What do IG clients think?

Using data available from IG’s research centre2, we can see a definite split in opinion when it comes to those who have positions open on the US and UK indices.

At the moment almost eight out of ten client accounts with open positions on the Dow are expecting a fall, while for the FTSE sentiment is more positive with 59% of client accounts who have a position expecting a rise. An obvious explanation would be the relatively strong performance by the US markets this year, which a proportion of clients clearly feel may soon run out of steam. 

FTSE 100 and Wall Street client sentiment

Source

[1] Stock Trader’s Almanac, J Wiley (22 November 2013)
[2] Correct as of November 19

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