“In his novel Pudd’nhead Wilson the American writer Mark Twain cautioned about October, saying: ‘This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.’ Yet even he might have to admit to December’s festive charms, as it is easily the best-performing month over time,” says Russ Mould, AJ Bell investment director. “Since its launch in 1984, the FTSE 100 index has gained 2.2% on average in December, whereas April and July are the only other months to offer an average advance of 1% or more.
“If you want to know why markets talk about the Santa Rally, that is why – because the numbers back it up. The FTSE 100 has spent all year huffing and puffing to no great effect, as the index is all but unchanged compared to where it began the year, even if dividends, and in some cases buybacks, have bolstered total returns.
Source: Refinitiv data
“Quite why the Santa Rally should occur is less clear.
“Investors used to talk about ‘the January effect’, as money managers put clients’ money to work and into the market in the new year, but since 2000 the FTSE 100 has only risen nine times in 20 attempts in January and has chalked up fifteen losses, so that may be the end of that.
“It is possible that the Santa Rally has developed because investors have looked to anticipate the January effect and price it in, or discount it. Anything is possible at a time when passive investing and algorithm-driven funds generate such strong flows, but another possible explanation is year-end ‘window-dressing’ by professional money managers, as they put money into the market, bid up stocks and generate a bit of extra positive performance to help appease clients and justify fees. This has been a difficult year for active money managers as indices and individual share prices have whipsawed and the November rally could leave a few laggards chasing performance as the year draws to a close.
“But for all of its apparent reliability – the FTSE index has fallen just eight times in December since 1984 and only five times since 2000 – the Santa Rally is not certain to offer anything more than festive cheer because it does not seem to be a reliable indicator for the following year.
“The FTSE 100 has served up 11 annual losses since 1984 and ten of those came after a gain in the December of the previous year – the only exception was 2015, where a 4.9% annual decline came after a 2.3% slide in December 2014.
“If anything, some of the best Decembers have led to the most treacherous subsequent years – a buoyant festive season in 1993 was followed by 1994’s Fed rate rise shock, 1989’s knees-up let investors stumble into a recession and a bear market while 1999’s party led to the hangover that came with the collapse of the technology bubble in 2000.
“If nothing else, that may back up Warren Buffett’s old aphorism that: ‘The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.’
“By contrast, some grim Christmases – 1985, 1990, 1994, 2002 and 2018 – have been followed by cheerful years. Only one of the eight December drops in the FTSE 100 has set a trend for the following year, and that was 2014. Even then, the UK’s leading index shed just 4.9% of its value in 2015.
“The jury is still out on 2023. December 2022 yielded a lump of coal, in the form of a 1.6% drop, and so far the FTSE 100 is down 0.4% in 2023, with a month to go.”
Source: LSEG Datastream data. *FTSE 100 performance to the close as of 29 November 2023.
