Will December 2020 see the return of the Santa Rally to provide some seasonal cheer?

With COVID-19 continuing to cause major disruption to how we live our lives, Christmas this year will be far from normal. End of year work parties have been cancelled or will take place online and the hospitality sector is either closed across much of the country or will operating under tight restrictions this festive season. Families and friends will be able to meet up during a five-day window but only as part of an exclusive ‘bubble’.

With many UK households having taken a financial hit this year, it may seem like there is little to celebrate. However, there is a light at the end of the tunnel, with positive recent news that effective vaccines are on the way. This has certainly injected some pre-Christmas cheer into the stock market in recent weeks as investors eye a rebound in the economy next year and better times ahead. Since the start of November, the UK stock market has posted an impressive 13.3% return (MSCI United Kingdom Index), though it is still down -14.4% since the start of the year.

While short-term market moves are hard to predict, investors may be hoping for a financial Christmas present over the coming weeks if the “Santa Rally” phenomenon returns. This is the nickname given to a trend which has historically seen December experience a very high incidence of positive returns for share prices.

Bestinvest, the online investment service for private investors, points out that since 1989, the UK stock market has delivered positive total returns 84% of the time during the month of December, a far higher success rate than any other month.

Source: Bestinvest / Lipper. Data represents incidence of positive total returns for each month since start of 1989 on the MSCI United Kingdom Index.

Not only has December typically been a much more reliable month for making investment gains than most, Bestinvest’s analysis of over 30 years of data also reveals that the average monthly returns have also been higher during the festive season than any other month at 2.27% (including dividends) and 2.11% in share price movements alone (excluding dividends).

Source: Bestinvest / Lipper. Data represents the average monthly return on the MSCI United Kingdom Index, both in capital returns and total returns (dividends included) since the start of 1989.

Jason Hollands, Managing Director of Bestinvest, commented:

“The so-called Santa Rally does seem to be one of the more convincing seasonal investment trends but that certainly does not mean it will deliver every year. Indeed, December 2018 and 2002 were particularly tough months and so we would urge investors to focus on longer-term time horizons.

“There are various theories around why December tends to be a good month for the markets which go beyond the feel good factor of the ‘Magic of Christmas’. Perhaps the most credible explanation for the Santa Rally effect is that at the end of the year, markets get a bit of a boost as professional fund managers both look back on the year past and positon for the year ahead, investing any spare cash in their funds to “window dress” their portfolios ahead of reporting periods to clients in the New Year.

”It will be interesting to see what happens this December, which could be a really notable one for the UK market depending on whether a trade deal is reached with the EU over the coming days and weeks. The UK stock market has quite high exposure compared to other markets to some of areas hardest hit by the pandemic, such as energy and financial services. If global investor confidence grows that the end of the pandemic is in sight, and post-Brexit trade uncertainties substantially lift, it could bring renewed interest in UK shares for their recovery potential.

“The US stock-market will also be one to watch closely this December, because electric vehicle pioneer Tesla is set to enter the key S&P 500 Index of large US companies in December having recently met one of the key criteria that had kept it out in the past: achieving profit. With a current market value of $555 billion, it is set to enter this important benchmark in a top ten position. This will require popular US index-tracker funds to buy shares in it, but also reduce exposure to other companies to make room for it. Since Tesla’s future inclusion in the index was confirmed on 16 November, the shares have surged nearly 44%, a sign that investors spied an opportunity to pile in ahead of forced buyers in December. It will be interesting to see how much impact this shake-up has on the overall US stock market.”