Will a Santa Rally provide festive cheer for investors this year?

Equities often get a seasonal boost during December - but will there be a Santa Rally in 2023?

The Fearless Girl statue wears a Santa hat outside the New York Stock Exchang
(Image credit: Getty Images)

Every year the stock market typically benefits from what has become known as the Santa Rally - when equities perform well during the Christmas season. But can we expect one in 2023?

From geopolitical tensions to rising interest rates and high inflation, there has been plenty to spook the markets this year, but many investors will  still be hoping for some seasonal cheer from the so-called Santa Rally over the festive period.

US and global stock market indices have already performed well during 2023, with the MSCI World index returning 20.8% and the US S&P 500 up 24.5% so far.

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However, Jason Hollands, managing director of Bestinvest, highlights that gains have been concentrated in technology stocks seen as potential beneficiaries of the artificial intelligence boom.

The festive season could bring more cheer to investors and the wider equity market though as data shows that stock markets tend to experience a yuletide boost at this time of year, dubbed the Santa Rally.

Bestinvest analysis of global equities shows the MSCI World Index has the highest incidence of positive returns during December compared with any other month.

Meanwhile, analysis from Fidelity International shows the FTSE 100 has enjoyed a seasonal boost during December in 24 of the past 30 years, while the S&P 500 has delivered positive total returns on 23 occasions over the same period.

So what can investors expect from Santa this year?

What is the Santa Rally?

The Santa Rally is a popular investment trend that suggests equities typically rise during Christmas and the new year period.

December has unwrapped positive returns on 80% of occasions for the FTSE 100, and 77% for the S&P 500 during the past three decades, according to Fidelity.

Its research shows that markets tend to be resilient in the last month of the year, rallying even in challenging times. 

In December 2008, amid a 17-month bear market during the global financial crisis, and again in both 2020 and 2021 during the pandemic, markets delivered positive momentum during the festive period.

“While market superstitions and seasonal adages are rightly viewed with a hint of scepticism, the ‘Santa Rally’ appears to be the gift that just keeps on giving,” says Tom Stevenson, investment director for personal investing at Fidelity International.

It also appears to be a global phenomenon.

Analysis by Bestinvest shows the MSCI World Index has posted positive returns 74% of the time during December over the past 50 years. In contrast, the average month has typically seen positive returns 62% of the time.

UK equities have performed even better during December, according to Bestinvest, with the MSCI United Kingdom Index posting positive returns 82% of the time during December.

There are a few reasons cited for the Santa Rally, such as thin trading volumes around the Christmas holidays amplifying market moves.

“Alongside the magic of Christmas, there are various theories as to why stock markets tend to do well in the month of December,” says Jason Hollands, managing director of Bestinvest.

“These include the markets getting a boost as fund managers position for the year ahead, investing spare cash in their funds before the holiday break to ‘window dress’ their portfolios ahead of reporting periods.   

“Another factor at play in more recent times might be hedge funds closing out  positions before the year end, which in practical terms requires them to re-purchase shares that they have previously borrowed off other investors and sold, in order to return the shares to the lender.”

When is the Santa Rally?

The Santa Rally term was first coined in the 1970s by Yale Hirsch, the founder of the Stock Trader’s Almanac.

At the time it highlighted the tendency for the stock market to rise by 1% to 2% during the final five trading days of the outgoing year and the first two of the new year.

But just as Christmas seems to start earlier nowadays, the rally is often applied to the whole month of December.

Will there be a Santa Rally in 2023?

There are signs that the Santa Rally is on its way, with the FTSE 100 up 1.8% so far this month, while the S&P 500 is up 4.6%.

There is no guarantee of a Santa Rally but Hollands highlights another argument that the trend reflects a natural tendency towards optimism as the new year approaches. 

 “There are some reasons to hope a Santa Rally will arrive this year and lift investor spirits,” he adds.

 “The UK market could certainly do with. After all, the widely predicted recession did not arrive, inflation has slowed significantly, and interest rates appear to have peaked. Despite these pressures, company earnings have proven resilient.”

 There are plenty of uncertainties that could stop Santa from coming though.

 “The global outlook is finely balanced as economic growth is expected to slow as the lagged effect of one of the most aggressive cycles of interest rate rises in decades bites and it is notable that most forecasters appear to be shying away from bold predictions for the year ahead,” he adds.

 “2024 also brings political uncertainties with a significant number of elections taking place, including a potential general election in the UK and the US Presidential elections. ”

Stevenson adds that the broader performance of the market is influenced by various external factors.

“Attempting to time the market, especially on the basis of past performance, carries a lot of risk,” he says.

“A more sensible investment strategy is to remain invested through the market cycles, save regularly, and ensure diversification across different asset classes and geographies.”

Marc Shoffman

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.