In this guide, we explain what a Santa Rally is, why the markets tend to go up around Christmas and if it is likely to happen this year…
Are you prepared for a ‘Santa Rally’ in 2019?
A Santa Claus rally describes the tendency for stocks to appreciate during the final sessions in December. This is one of the calendar effects in a year. The other prominent calendar-based observations include the ‘January Effect’ and ‘Sell in May‘.
Why does a Santa Rally happen?
Psychology perhaps play a large part. Christmas is a festive season and the general mood tends to be more bullish than in recent weeks.
Historically, September is found to be the weakest month of the year. Over the years, the average return for September is about minus 1% for the Dow Jones Industrials Index since 1897 (see Chart 1).
Moreover, the September and October often produce the worst monthly returns of a year. December, in contrast, is a far quieter month (Chart 2). Not many market crashes happened in December.
As such, during the last weeks of the years, CFD traders would like to put these behind ‘bad’ episodes behind them. Christmas parties set spread bet traders and investors on a more bullish mood for the year ahead. Stock prices rise accordingly.
– Chart 1 –
– Chart 2 –
What happened last year’s 2018 Santa Rally?
In 2018, however, December was the worst month for many equity indices such as DJ Industrials. The first time this occurred in decades. Behind this drop were a) The sharp rise in bond yields during October and b) the unrelenting rate rise by the Fed.
The US central bank continued its hawkish stance well into December 2018 when it hiked the policy rate for the ninth time since late 2015. Investors were well schooled by this ‘don’t fight the Fed’ rule – and fled the stock market. Prices collapsed.
Only after the Fed changed its policy direction did the stock market rally in the first few months of 2019.
This year, the Fed initiated a stealth QE by buying $60 billion worth of short-term Treasuries. This is to pump liquidity into the funding market. Accommodative monetary policies are always stock market friendly.
Hence, a repeat of last year’s rout is unlikely to happen unless investors expect the real economy to collapse into a recession or a financial crisis erupts unexpectedly.
The Santa Rally: Does it work here in the UK?
Historically, the FTSE 100 has never featured a bad December. Data since 1984 shows that December – and July – were never the worst month of the year.
January, on the other hand, was the worst month of the year six times in 35 years (see Chart 3) Therefore, I suspect that the last month of this year may sail through affirming a potential Santa Rally.
A fly in the ointment to this Santa Rally could be Brexit. As readers know, UK is currently going through a difficult political phase trying to deliver Brexit. This single factor may cause markets to move violently in either direction.
For now, as things stand, I expect a fairly firm market heading into the new year given the potential of a Brexit deal, continuing Fed easing, and more QE by the European ECB.
How to play this Santa Rally?
Buy low and sell high. Watch for dips in market during October and November, buy them, and sell into the Santa rally.
– Chart 3 –
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