Children may already be compiling their Christmas lists, but traders also want a gift in the form of a “Santa Rally”. When this phrase was first coined in 1972, the rally only referred to the stock market’s performance during the final trading days between Christmas and the New Year. But in recent years the term has broadened to cover the entire month of December.
The theory is that festive cheer and holiday household spending make the markets more optimistic. Ben Laidler of eToro also thinks that outperformance in December could be due to markets anticipating a new flow of cash from investors in January.
Whatever the reason, there does seem to be strong evidence of a December effect, especially for smaller shares. Laidler notes that over the past 50 years, the FTSE 250 mid-cap index has returned an average of 2.7%. However, other markets have done well, with the S&P 500 putting in an above-average performance of 1.7%.
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Interestingly, the Hong Kong stock market has been the global top performer, with an increase of 3% over the last half-century, despite the fact that Chinese New Year, which takes place between late January and late February, is the key event.
Of course, there are a few exceptions to the festive cheer. IBEX, the main Spanish index, has historically underperformed in December, with a miserly 0.6%. And even in the US and UK, traders have occasionally received a lump of coal in their stockings, with the S&P 500 finishing December lower than it began around a quarter of the time (as it did last year when it dropped by 5.9%). Still, in general, December is a good month. Laidler says that global equities have returned an average of 1.8% since 1972.
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