- FTSE 100 rose by 2.2% in December, but America’s S&P 500 made no gain
- Coal rather than cash at the end of one year does not guarantee misery in the next
- January has been, on average, a positive month for UK and US equities
- Of greater note may be how the S&P 500 has advanced at a double-digit percentage rate for three years in a row – it has achieved four consecutive gains of this size only once before
“The Santa Rally delivered cash to investors in the UK but a modest lump of coal to those on the other side of the Atlantic, because the FTSE 100 rose by 2.2% in December while America’s S&P 500 slid by 0.1%,” says AJ Bell investment director Russ Mould.
“That may buoy backers of UK equities, especially as January has a record of being a decent month, on average, but it may not deter would-be buyers of the USA, either, as a weak end to one year does not mean that the new year is guaranteed to lack cheer, at least if history is any guide.
“Admittedly, there is no shortage of things about which investors can worry, since sticky inflation, mountainous (and growing) government debts and geopolitical risk all require attention. America’s exfiltration of Venezuela’s President Maduro is a reminder of the last-named, and we are less than a week into the new year, although stock, bond, commodity and currency markets seem to be taking Washington’s display of military and political clout in their stride, at least for now.
“The FTSE 100 is hovering around the 10,000 mark and a concerted move above and beyond that threshold could help further improve the mood music around the London market.
“December was a good month, as the 2.2% advance in the FTSE 100 slightly exceeded the historic average of a 2.1% gain. The UK’s benchmark index has declined in December just nine times in the 42 years since its inception in 1984.
“A good end to one year does not mean a strong gain in the following one is guaranteed. The UK’s benchmark index has served up eleven negative years, in capital terms, since 1984 and ten of those followed an advance in December – 1990, 1994, 2000, 2001, 2002, 2008, 2011, 2014, 2018 and 2020. Only 2015’s dud return was preceded by a bleak Christmas.
“Note that those down years were generally marked by some major event, notably a recession in 1990, the mid-cycle US interest rate shock of 1994, the bursting of the technology media and telecoms bubble in 2000-2002, the Great Financial Crisis in 2008, then the Eurozone debt crisis and US debt downgrade in 2011 and the pandemic in 2020. In this respect, investors must continue to check what, if anything, could disturb markets’ current preferred narrative of cooler inflation, lower interest rates and steady growth in both economies and corporate profits.
Source: LSEG Refinitiv data
“The S&P 500 is drawing support from hopes for the same scenario, even if December was the tenth time in 42 years that Santa failed to inspire a festive surge in US share prices.
“This in itself may not be enough to deter would-be buyers of US stocks, especially as the S&P 500 rose in the following year on seven of the prior nine occasions, with the index offering double-digit percentage gains in five instances, including 2024’s 16.4% capital gain.
“The only exceptions were 2007, which was followed by the zenith of the Great Financial Crisis in 2008, and 2014, when US equities trod water thanks to a mid-cycle economic growth scare in the following year.
Source: LSEG Refinitiv data
“Consensus analysts’ forecasts of 18% growth in earnings per share (EPS) across the S&P 500 in 2026 suggest that no-one is expecting a repeat of anything like those episodes in the coming twelve months. Three consecutive years of double-digit percentage capital gains will also be boosting that confidence, since mood tends to follow price.
"This is just the sixth time since 1900 that the S&P 500 has managed this feat of three straight double-digit percentage advances and investors may not be too excited by the historic precedents as to what happened next.
“On four of the prior five occasions, the S&P 500 stumbled – in 1946, 1953, 2015 and 2022. In the other instance, America’s headline powered ahead again, to rack up a fourth and then a fifth consecutive double-digit percentage gain in 1998 and 1999, only to then give up all of those gains during the brutal bear market of 2000 to 2002.
“As such, it might not be entirely wise to assume that 2026 will add to the current storming bull run, especially as valuation metrics such as the Shiller cyclically adjusted price earnings (CAPE) ratio, market capitalisation to GDP, market capitalisation to corporate gross value added (GVA) and price-to-book ratio all look lofty by historic standards.
“Equally, bulls will look to the experience of the 1990s for comfort, especially given how the current enthusiasm for AI-related stocks mirrors the TMT boom of thirty years ago and how the US Federal Reserve’s track record since then is one of providing cheap liquidity as and when markets need it in times of trouble. If the 1990s prove to be the model for the 2020s then the US equity bull market could have another year or two to run.”
Source: LSEG Refinitiv data
