He’s making a list and checking it twice, but will Father Christmas bring a Santa Rally to the stock market in 2024?
Equities often get a seasonal boost towards the end of the year, known as the Santa Rally.
It could be the icing on the cake for investors after a year of stock market action, helped by the continuing growth of technology and artificial intelligence stocks, that has put equities on the nice list so far.
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Donald Trump’s return to the White House has also boosted the US markets.
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Meanwhile, slowing inflation and interest rate cuts have increased market confidence but this could well be dampened by the Autumn Budget, with tax rises falling into the naughty list, and Scrooge-like rhetoric from central banks.
Data shows that December typically brings another month of festive cheer and it can often be the best-performing period for investors.
Research by eToro, looking at monthly price returns for 14 of the world’s largest stock indices from the S&P 500 to Germany’s DAX 40, shows that a quarter of annual returns are often delivered in December.
The analysis of 50 years of data reveals that returns in December average 1.63%, outpacing the 0.57% average monthly return from January to November.
The UK's FTSE 100 is also often a top performer in December.
Research by Fidelity shows the FTSE 100 has enjoyed a Santa Rally 24 times since 1994, with the S&P following suit on 23 occasions.:
“Market superstitions and seasonal adages are rightly viewed with a hint of scepticism,” says Ed Monk, associate director for personal investing at Fidelity International.
“That said, the ‘Santa Rally’ does seem to be the gift that keeps giving - most years at least.”
Is a Santa Rally happening in 2024?
Unfortunately, there doesn’t appear to be much sign of a Santa Rally this time around.
The S&P 500 has fallen 2.7% between the end of November and 19 December’s close. The FTSE 100 has fallen 2.2% over the same period.
The biggest catalyst for this slide in share prices has been the Federal Reserve’s hawkish rhetoric following its most recent policy meeting. While the central bank cut rates, chair Jerome Powell indicated that cuts could slow or stop altogether in the year, spooking markets. The S&P 500 fell 2.9% on 18 December, the day of the meeting.
Pacome Breton, head of portfolio management at Nutmeg, reminds us that a Santa Rally is never guaranteed.
“While the Santa Rally has been an attractive theory for investors to believe in over the last few years, and there is some logic to this belief, it is clear from the data that market performance in December can be volatile,” he says.
Rather than hoping for a Santa Rally, time in the stock market is often seen as more important than timing it.
“With such a strong narrative around this seasonal phenomenon, it can be tempting to time the market and expect returns to materialise,” adds Breton.
“Looking at past performance, a Santa Rally is by no means guaranteed nor delivered equally. In 2018, developed markets fell as investors became uneasy about low growth and a potential US-China trade war. Only by ensuring your portfolio is diversified globally can you benefit from a Santa Rally where it appears.”
Gabriel McKeown, head of macroeconomics at Sad Rabbit Investments, says: “The most prudent approach for investors is to focus on building a robust investment strategy that can deliver returns long after the Christmas lights have been packed away.”
What is the Santa Rally?
The Santa Rally is an investment mantra trend that suggests that stocks typically rise during the Christmas and new year period.
It is often attributed to thinner trading volumes around the Christmas holidays that may amplify market moves, while City workers may be investing their bonuses.
Fidelity’s analysis shows December has only been a negative month for the FTSE 100 and S&P 500 six and seven times respectively between 1994 and 2023.
The most recent December dip was in 2022, when the markets were kept down by the energy crisis and former prime minister Liz Truss’ mini-Budget.
The market has even had a rally in challenging times though. In December 2008, in the middle of a 17-month bear market during the global financial crisis, and again in both 2020 and 2021 during the COVID-19 pandemic, markets still delivered positive momentum during the festive period, according to Fidelity.
Investors benefited from a Santa Rally in December 2023. The FTSE 100 rose by 3.9% , while the S&P 500 was up 4.5%.
“December 2023 brought good tidings on both sides of the Atlantic after a Grinch-like 2022,” adds Monk.
