The Santa rally: fact or fiction?

You’ll often hear about a so-called Santa rally affecting stock markets in December, and there’s strong evidence that it exists in the majority of years. But it doesn’t start on 1 December and it doesn’t end on 24 December.

Trader reflected in a data screen
Source: Bloomberg

Over recent years UK investors have come to expect the Santa rally, where the FTSE 100 posts a positive return in December. Indeed over the past 30 years, the FTSE has made an average gain of 2.26% in December, rising in value 83% of the time.

Quite why this phenomenon should occur is unclear, with theories ranging from seasonal goodwill among investors, markets rising on lower volumes to fund managers re-balancing their portfolios before the year-end.

Interestingly there is no agreement about when the Santa rally really starts, with sources offering conflicting answers; is it the whole of December, the week running up to Christmas, or any time period outside this? At IG, we decided to perform our own analysis, running the numbers over every December time period combination (all 465 of them) over the past 30 years.

The results are interesting. We found the best time period to invest has been 15-31 December, with an average annual return of 2.53%, and a positive return 87% of the time. Showing that December 15 is not a complete anomaly, 14-31 December (+2.42%) and 16-31 December (+2.50%) were also in the top ten.

Chart: historic returns of FTSE 100 over the festive period

In contrast, investing over the first half of the month (30 November to 15 December) would have been a poor strategy over time, yielding an average loss of -0.23%.

In the chart below we show how an investor following our strategy might have performed (assuming no transaction costs or tax) over our time periods. 

Chart: the December investment index

As with any analysis of historic data we can’t guarantee these trends will continue into the future; those looking for Santa to shower them with Christmas presents do so at their own risk.

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