Is the Santa Rally coming to town?

It's time of year again, when we plaster our homes with decorations and consume copious amount of food – all in the name of Christmas.

But the festive season also brings cheer to the investment markets, because it usually marks the start of the so-called Santa Rally – when stock prices surge in December, often seeing their biggest monthly gains of the year.

Yet 2017 has already shaped up to be an impressive year of returns across most stock markets, so the question now is how much longer will the partying go on?

Relying on the rally

While some seasoned investors are dubious about relying on the Santa Rally to scoop up gains, analysis from asset manager Schroders looking at the past 30 years shows December was nearly always the best performing month for the FTSE 100 – rising 83 per cent of the time.

The research, which goes as far back as 1987, indicates that markets rose by 2.4 per cent on average in the last month of every year.

Schroders also conducted the same analysis across other major stock markets, including the S&P 500, MSCI World, and Eurostoxx 50 indices, which rose 79 per cent of the time in December.

Tis the season to be jolly

The reasons why stock markets tend to rise at this time of year has been the subject of much debate.

One theory is based around investor psychology. Indeed, an abundance of goodwill cheer in the holiday season could put investors in a positive mood, which ultimately drives more buying than selling, says James Rainbow, who co-heads the UK intermediary business at Schroders.

Another argument is that fund managers, which account for a large part of share ownership, are rebalancing portfolios before the year draws to a close.

Other technical reasons could revolve around tax considerations, or hedge funds closing down short positions that have not played out as expected.

So will we see a Santa Rally this year?

The markets have been on a rampage throughout 2017. In fact, the S&P 500 has seen positive gains in every month so far, and if the trend continues in December, it will be the first time in three decades that the index has risen every month in a year.

Of course, this means that markets will have even further to travel if December is going to be the best performing month.

But that doesn’t mean a Santa Rally is off the cards.

This year has been a rare period of synchronised global growth, with markets supported by better profitability from business.

Jason Hollands, managing director at Tilney Group, thinks 2017 could be the year when every single month went well for investors.

“It’s certainly a tantalising possibility, and one which observers of seasonal trends in stock markets might have good reason to feel optimistic about.

“With stock markets currently riding high and market volatility as calm as a duck pond, there is every possibility of yet another good month this December.”

Tread gingerly

But there are risks of relying on this short-term trend, particularly bearing in mind the markets are long overdue a sell-off.

Adrian Lowcock, investment director at Architas, says a minor change in confidence could prompt a quick correction, even during the Christmas season. Headwinds from the US and North Korea could easily dampen the cheery trend, and let’s not even go there on Brexit.

But trying to time markets is a dangerous game under any circumstances, despite research showing a short-term surge is more than likely.

“Those looking to gamble simply on Santa spreading his goodwill around the markets again this year do so at their own risk,” says Rainbow. “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.”

Investments aren’t just for Christmas

Unless you’ve got a crystal ball, it’s impossible to predict when the best days or best months might fall. So investors are best served by taking a long-term approach.

In fact, figures from Architas point out that if you only bought FTSE 100 shares in the Santa Rally since 1986, your investment would have grown by 79 per cent including dividends.

But if you had stayed invested all the time, you would have scooped up a whooping 1,387 per cent return before fees.

The Santa Rally is a seasonal trend, but bearing in mind the reasons behind it seem to have more to do with human behaviour than fundamentals, Lowcock says most investors should probably ignore it.

“Given that markets are have been fairly stable and risen significantly this year, investors would be better off keeping a sober mind and looking to protect their investments in case of a January hangover.”

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