Robin Morton from our investment team in Peterborough gets festive in this week’s update.

The Santa Rally refers to the tendency for the stock market to rally over the last weeks of December and into the New Year. Looking at the statistics for the US S&P 500 Index, nearly three quarters of the Decembers dating back to 1950 have resulted in positive gains for shareholders, with an average return of +1.37%. In recent years, the trend has remained intact, although not to such a significant extent. Over the last decade, 70% of Decembers have resulted in positive returns for the S&P 500, with an average return of +0.18% (although this is skewed by a particularly bad December in 2018, when the index fell by over 10%).

In the UK, the trend is even more pronounced. In stark contrast with the UK stock market’s long-term underperformance of the US market, December is one month in which the FTSE 100 has a habit of outperforming the S&P 500. In fact, the FTSE 100 index has fallen just three times in December since 1995, which is a strike rate for positive returns of nearly 90%.

Interestingly, there doesn’t appear to be one clear reason for this. One school of thought is that a general feeling of optimism and happiness, fuelled by the holiday spirit, means that investors are more inclined to buy rather than sell. This is enhanced by the investing of Christmas bonuses and increased retail spending, which benefits the economy. A more prosaic theory is that large institutional investors settle their books before going on holiday for Christmas, closing out short positions and ‘window dressing’ their portfolios before the end of the calendar year. While institutional fund managers are away from the market for Christmas, volumes tend to be lower than normal and it leaves the market to retail investors, who tend to be more bullish and push the market higher.

So, will we see a Santa Rally in 2020, or will the market buck historical trends and recent strong momentum to finish on a weaker note?

It seems logical that further good news on coronavirus vaccines could push the FTSE 100 higher. News of positive vaccine trials has already been factored in by markets, but as vaccines are approved by regulators and rolled out to the population, the sense of optimism towards the future should continue to grow. Despite recent gains, UK shares remain cheap relative to elsewhere in the world, and could have significantly further to rise if they are to play catch-up with US stock market valuations, for example.

In the UK, much will depend on whether our politicians are able to successfully negotiate a Brexit trade deal before Christmas. Deadlines have proven to be flexible, with both sides playing a game of posturing and brinkmanship. However, it is still hoped that a deal will be reached at the 11th hour. If we do get a long-awaited Brexit deal, expect the pound to bounce against the Euro and the Dollar and UK domestic stocks to rally strongly, particularly those benefiting from a stronger currency and cheaper imports. A Brexit deal would be the most potent trigger for a Santa Rally!

Data sourced from S&P and FTSE