Markets

The "83.3% chance" that the Santa Rally exists

The Santa Rally, when shares surge in the run-up to Christmas, is real, suggests analysis of three decades of data.

01/12/2017

David Brett

David Brett

Investment Writer

The Santa Rally may be real. The FTSE 100 has been more likely to rise in December than any other month, according to analysis of 30 years of data.

And it has not just been about the frequency of rises in December, but also the size of the gains. The FTSE 100 has risen by an average of 2.4% in December, since 1987. It is the highest average gain of any month. June has been the worst month, with the stockmarket index falling by an average of 1%.

The analysis, conducted by Schroders, stokes the debate over the existence of the “Santa Rally”, an alleged effect often dismissed by seasoned investors.

The chart below shows the frequency, in aggregate, with which the FTSE 100 rose in each month from the start of 1987 to the end of 2016.

The frequency of FTSE 100 rising per month since 1987

 

Source: Schroders. Thomson Reuters Datastream data for FTSE 100 correct as at 21 November 2017. This material is not intended to provide advice of any kind. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Past performance is not a guide to future returns and may not be repeated.

The analysis clearly indicates that the market has in the past risen more frequently in December, with the FTSE 100 rising 83.3% of the time. October is the second best performer, with a figure of 74.2%. This is in contrast to the weakest months of June and September when the market has fallen more times than it has risen.

Our analysis also looked at the average returns for each month, shown in the chart below.

The Santa effect also seems to work in this aspect. December was found to be the strongest month, rising by 2.4% on average. April was the next best month, with an average increase of 1.8%.

Broadly speaking, the summers were bad for the FTSE 100 with the exception of July, when markets gained an average of 1.4%. The worst month, with an average loss of 1%, was June.

Average FTSE gains by month since 1987

 

Source: Schroders. Thomson Reuters Datastream data for FTSE 100 correct as at 21 November 2017. This material is not intended to provide advice of any kind. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Past performance is not a guide to future returns and may not be repeated.

Schroders has conducted the same analysis across other major stockmarkets.

It found world stockmarkets were more likely to rise in December than any other month. Global stocks –measured by averaging across the FTSE 100, S&P 500, MSCI World and Eurostoxx 50 indices - rose 79.2% of the time in December. The weakest month was June.

The gains made in December – averaging 2.1% since 1987 - also made it the month of biggest increases. August had been the worst month, with stockmarkets down by 1% on average. Click here to read the full report: The 79.2% chance of a Santa Rally for global stocks.

Why have stockmarkets performed better in December?

James Rainbow, Co-Head of Schroders’ UK Intermediary Business, said: “There is much speculation on why stockmarkets rise at this time of the year during what is also called the ‘December effect’.

“One theory is based around investor psychology. There is, perhaps, more goodwill cheer in the markets due to the holiday season putting investors in a positive mood, which drives more buying than selling.

“Another view is that investors, which account for a substantial part of share ownership, are re-balancing portfolios ahead of the year-end.”

The danger of superstitions

Those looking to gamble simply on Santa spreading his goodwill around the markets again this year do so at their own risk. Trying to time markets at all is a questionable strategy as it is impossible to predict short-term movements in the market.

Taking a longer-term approach has in the past provided better returns than the Santa Rally.

The FTSE 100 has grown by 4.9% a year since 31 December 1986, according to Thomson Reuters data. That means if you invested a notional £1,000 in the FTSE 100 in 1986 and left the money alone for the next 31 years, your investment would now theoretically be worth £4,463.

Schroders’ James Rainbow said: “Stockmarket superstitions are true until they fail to be. Just because the Santa Rally has happened before, doesn’t mean the pattern will be repeated.

“In reality it’s impossible to predict when the best days or best months might fall. Investors are better served by a long-term approach. If you invest for five or 10 years, it gives your investments more time to work properly and to iron out the volatility.

 “Over the last two decades, the stockmarket has become more volatile. It makes the need for a long-term approach all the more important.”

Please remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

- Investment test: investIQ

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