Are investors getting a Christmas rally for free?

• December is considered a typically strong month for the stock markets

• We look at 50 years of monthly market data for global stocks

• June is, on average, the most dangerous month for stock markets, both globally and in the UK

• Read the full article to find out if investors will have a merry Christmas

Typically, markets post gains from the first trading session after Christmas to the second trading session of the New Year, but will there be a Christmas rally in this year of the cost of living crisis?

Figures from Bestinvest show that this is not a myth, as December is the month with the highest return rate for investors. Stocks make gains 76% of the time, a far higher percentage than in any other month.

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“As the year comes to an end, investors could use some Christmas cheer. Could the month of December offer a financial Christmas present? If history is anything to go by, it’s possible. The reason for this is that December has a reputation for being a typically strong month for equity markets – a phenomenon known as the ‘Santa Rally,'” said Jason Hollands, Managing Director of Bestinvest.

The data also shows that the UK stock market (using the MSCI United Kingdom Index of large UK companies listed on the London Stock Exchange) continued its strong performance in December, with the month delivering positive total returns 76% of the time and recording an average monthly gain of 2.26% over the 50-year period.

“However, unlike the global snapshot, the UK saw the most gains overall in April, delivering positive returns 82% of the time,” Hollands said.

Looking at the MSCI World Index, which includes more than 1,500 of the world’s largest listed companies, Bestinvest found that December was the month with the most consistent positive gains in global equities. An average total return of 1.45% for the festive month also compares well with the average monthly return for global equities across all months over the past half century of 0.95.

“Particularly impressive Santa rallies occurred in 2010 (6.8%), in 2008 in the wake of the global financial crisis (10.2%) and in 1999 at the height of the dot-com bubble (6.8%),” said Hollands.

“In his novel Pudd’nhead Wilson American writer Mark Twain warned about October, saying: “This is one of the most dangerous months for stock speculation. The others are July, January, September, April, November, May, March, June, December, August and February.” Yet even he has to admit the festive charm of December, as it is clearly the best performing month over the long term,” said Russ Mould, investment director at AJ Bell.

The story continues

“Since its launch in 1984, the FTSE 100 index has gained an average of 2.3 percent in December, while April and July are the only other months to have averaged gains of 1 percent or more,” he added.

For Mould, the Santa Rally is more fact than fiction, because the numbers prove it.

Source: Refinitiv

“The FTSE 100 has suffered 11 annual losses since 1984, and 10 of those have come after a gain in December of the previous year ⁠— the only exception being 2015, whose annual decline of 4.9% followed a 2.3% decline in December 2014,” Mould added.

“If anything, some of the best Decembers led to the most treacherous years that followed – a cheery holiday season in 1993 was followed by the Fed’s rate-hike shock in 1994, the big excitement of 1989 sent investors stumbling into a recession and bear market, and the party of 1999 led to the hangover that accompanied the bursting of the tech bubble in 2000.

“If nothing else, this confirms Warren Buffett’s old aphorism: ‘The less cautious others are in conducting their affairs, the more cautiously we should manage our own affairs.'”

Among the reasons why equity markets tend to perform well in December is that markets experience a boost as City fund managers position themselves for the year ahead and invest any surplus money in their funds to beef up their portfolios ahead of reporting periods.

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Another problem is that hedge funds that make negative bets on companies – so-called “short positions” – close out some of those positions before the end of the year. This would require them to buy back shares they borrowed from other investors to sell later and then hopefully buy them back at a lower price before returning the shares to the stock lender.

“Of course, it could just be the joy and magic of Christmas,” Hollands added.

Stocks try to get into the Christmas spirit

After some good earnings and consumer confidence numbers from the US, stock markets gained ground this week, but was that enough?

“The question is whether the rebound from Tuesday’s lows is the seasonal Christmas rally that is on the horizon. It’s always a bit of a guess at this time of year… you could easily see a retest of 4,000 on the S&P 500 before resuming the downtrend that is still prevailing overall,” said Neil Wilson, chief market analyst at Finalto.

“Bulls would need to break 4,100 to consider a more sustainable rally on the horizon. Ultimately, the inflation/recession/tightening story cannot be ignored and I firmly believe there will be at least one more major upswing – the big one, much bigger than the one we saw in 2022 – that will wipe out the bulls – there is just too much bull sentiment left,” he added.

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