What is a Santa rally?
As the name implies, a Santa rally is the term for when stock markets post positive results in the run up to Christmas and New Year.
UK investors, for instance, have come to expect the FTSE 100 to achieve a good return in December. And from 1985 to 2015, the FTSE has indeed made an average gain of 2.26% in the last month of the year, rising in value 83% of the time.
And it isn’t just the FTSE that can benefit from a Santa rally, with stock indices around the world potentially affected. Often, though, talk of a Santa rally focusses on US indices.
What causes a Santa rally?
Quite why this phenomenon should occur is unclear, and in truth there are probably several factors behind each individual rally. But a few of the major theories on why markets rally in December include:
- Seasonal goodwill among investors, who are more willing to buy around Christmas
- Markets rising on lower volumes over the holiday period
- Fund managers rebalancing their portfolios before the end of the year
- People investing their Christmas bonuses
- Bargain hunting before stock prices rise in January (known as the January effect)
However, the biggest cause of a Santa rally may well be the psychology of the markets themselves. If indices post gains in December, people assume a Santa rally is on the cards and buy accordingly – leading to further gains.
When does a Santa rally start?
Interestingly, there is no agreement about when Santa rallies really start, with different sources offering conflicting answers. Does it last the whole of December, just the week before Christmas, or something in between?
At IG we decided to perform our own analysis, running the numbers over every possible combination of time periods on the FTSE and S&P from 1986-2015. And we found that the biggest rises in both indices typically occur from 16, 15 and 14 December. Overall, investing from these dates brought an average annual return of 2.53%, and a positive return 87% of the time. In contrast, investing over the first half of the month yielded an average loss of -0.23%. Read more about this analysis.
While you can get a broad idea of when a Santa rally might start by looking at historical data, each year’s Santa rally will be different. It might start early, it might start late, or it might not start at all. You can only know for sure if a Santa rally has taken place once it is already over.
How can you trade a Santa rally?
Santa rallies tend to have the most impact on major indices, so if you think one is about to start keep a close eye on markets like the FTSE 100, US 500, Wall Street and Germany 30. Of course, if those indices are on the rise then their constituent companies will be on the rise too – so large cap stocks around the world can be a good place to look.
Our market screener is a great way of finding stocks that suit your investment strategy.