• Marcus Brookes
  • 13 January 2020
  • 10 minutes

Santa chased away after delivering a rally

A so-called Santa rally refers to the rise in stock prices that often happens in the latter part of December and into early January. There’s no clear reason for it, but it coincides with some people receiving bonuses and also with many financial institutions suspending operations for the holiday. The former might be a source of money going into financial markets while the latter might remove some of the more cautious members of the investing community.

Whatever the cause, there has been a Santa rally in 25 times out of a potential 31 between December 1987 and December 2018. Global stocks have risen an average of 1.7% during the “rally” period [1].

This was definitely not the case in December 2018 when the FTSE All Share Index dropped by a substantial 6.9% between 1st and 27th December. Rather than delivering a rally in stock prices, Santa stayed in Lapland while concerns over global growth, international trade and domestic politics undermined investor confidence.

Roll forward a year and it appeared to be a different story. The Conservatives won a majority in parliament allowing them to drive a Brexit deal through and finally bring some closure to the saga. Meanwhile, the US and China were tripping the light fantastic over the preliminary trade deal that appeared imminent.

Markets then temporarily lost their Christmas cheer when Prime Minister Boris Johnson imposed an arbitrarily tight deadline for the UK to leave the EU; the Chinese and Americans renewed their testy exchange; and President Trump authorised the bombing and, ultimately, killing of Iran’s military mogul, General Qassem Soleimani.

This combination sent investors back into the fug of misery. The previously high expectations for the UK’s near-term outlook took a knock because Mr. Johnson is pledging to complete in around 10 months a negotiation process that normally takes several years. That halted stock price rises and pulled the value of the pound back down a touch.

International stock prices dropped as folk feared the continued threats to global economic growth through further delays to a US-China trade deal, and oil prices shot up following new worries that Iranian retribution might take the form of impeding oil deliveries through the Strait of Hormuz.

Santa finally managed to deliver a Christmas gift to investors in the form of a 5.8% rise in the value of the FTSE All Share Index between 11th and December 3rd January as well as a 3.0% increase in the American S&P 500 Index over the same period. The Nasdaq (an index comprising largely technology related companies) has subsequently hit a new all-time high.

Santa and his rally have come and gone. So now we return to the normal service of hoping that the politicians can sort out their differences which would likely rejuvenate economic growth and stock price rises. In the meantime, we believe stock prices are likely to swing rapidly between rises and falls as hopes of political solutions ebb and flow.

Santa’s not due back until December and, as far as UK investors are concerned, whether or not he visits could largely depend on Mr. Johnson’s flexibility on when the UK really will leave the European Union.

[1] Source: “Is the ‘Santa Rally’ real?”, Schroders Investment Management Ltd, 10 December 2019

Forecasts of future performance are not a reliable guide to actual results in the future; neither is past performance a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed and the investor might not get back their initial investment,

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