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.

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 31 years, the FTSE 100 has made an average gain of 2.36% in December, rising in value 84% of the time.

Quite why this phenomenon should occur is unclear, with theories ranging from seasonal goodwill amongst investors, markets rising on lower volumes and 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 31 years.

The results are interesting. We found that the best time period to invest has been December 15 to 31, with an average annual return of 2.51%, and a positive return 87% of the time. Showing that the 15th is not a complete anomaly, December 14-31 (+2.42%), and December 16-31 (+2.50%) were also in the top ten.

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 -0.12%.

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. 

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

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