The Santa Rally does exist, but is it off the cards for FTSE 100 in 2016?

David Brenchley
16 December 2016
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Once again in 2016, the age-old "sell in May and go away" failed, but investors may want to pay attention to another seasonal quirk.

While some may dismiss the Santa Rally along the same lines of "sell in May", research has proven stock markets do get a boost over the festive period.

The FTSE 100 has risen in 26 of the past 32 Decembers, with an average rise of 2.3% during the month. Furthermore, research from fund manager Schroders has shown December is the best month of the year for world markets.

 

Combined data for the FTSE 100, S&P 500, MSCI World and Eurostoxx indices since 1988 shows that markets have risen in December 75% of the time. The second best month is April, with stock markets posting a 70% success rate.

Reasons for this, according to Adrian Lowcock, investment director at Architas, include festive cheer and seasonal goodwill, lower trading volumes and fund manager’s repositioning their portfolios ahead of the year end.

Stock markets have followed the traditional December pattern so far this year, with a rise over the first two weeks (since close of play on 30 November to close of trading on 13 December, the FTSE 100 is up 2.84%).

The Santa Rally, though, applies just to the final fortnight of the month. Lowcock says these two weeks are statistically the strongest of the year.

Investors may be worried, though, that a strong November, driven by Donald Trump’s US presidential election victory, means the trend will not carry through to 2016.

Further, the FTSE 100 has come within a whisker of its record closing price of 7103 before but met resistance when attempting to pass that milestone each time. With every possibility it could still be hovering around the 7000 mark going into next week, the rally may not materialise.

 

Lowcock says a strong November does not necessarily mean that a Santa Rally is off the cards; he does, though, caution investors against participating in it.

Research from Architas shows that if you had only invested in the FTSE 100 each December since 1986, your investment would have grown by a paltry 74% including dividends. Whereas, those who stayed the course and invested all year round would have seen a return of 1,037% before costs.

In this case, Lowcock says, investors might be better off ignoring the Santa Rally. "Just investing for the Santa Rally is not a particularly successful investment strategy as investors would have missed out on over 90% of the returns from the FTSE 100," he adds.

"Given that markets are currently full of hope and optimism following the Trump victory, investors would be better off keeping a sober mind and looking to protect their investments in case of a January hangover."

James Rainbow, co-head of Schroders’ UK intermediary business, agrees, considering the "Sell in May" adage as a case in point. He highlights the fact that those who had sold at the FTSE 100’s highest point of the year in May would have missed out on a gain of 8% by St Leger’s Day, 10 September.

"Those looking to gamble on Santa spreading his goodwill around the markets again this year do so at their own risk," he continues.

"It really is one for the day traders to worry about. A far better approach is to think long-term. Make sure you have a clear investment plan and stick to it."

This story was originally written for our sister magazine, Money Observer.

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