Economics

The "79.2% chance" that the Santa Rally exists

The Santa Rally, when shares surge in the run-up to Christmas, is real, suggests analysis of three decades of data.

1 December 2017

David Brett

David Brett

Investment Writer

The Santa rally is real. World stockmarkets are more likely to rise in December than any other month, according to analysis of 30 years of data.

The gains made in December – averaging 2.1% since 1987 - also make it the month of biggest increases. August tends to be the worst month, with stockmarkets down by 1% on average.

The Santa Rally: the facts

The analysis, conducted by Schroders, which covers the world’s largest markets, adds to the debate over the existence of the “Santa Rally”, an alleged effect often dismissed by seasoned investors.

The chart below combines data for major equities indices - FTSE 100, S&P 500, MSCI World and Eurostoxx 50 - to show the frequency, in aggregate, with which they rose in each month from the start of 1987 to the end of 2016.

The frequency of stockmarkets rising per month since 1987

 

Source: Schroders. Thomson Reuters Datastream data for FTSE 100, S&P 500, MSCI World and Eurostoxx 50 correct as at 21 November 2017. Represents an average of the four indices. This material is not intended to provide advice of any kind. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Past performance is not a guide to future returns and may not be repeated.

The analysis clearly indicates that markets have in the past risen more frequently in December, 79.2% of the time. April was the second best performer, with a figure of 74.2%. This is in contrast to the weakest months of June, August and September.

Our analysis also looked at the average returns for each month.

The Santa effect also seems to work on this front. December was found to be the strongest month, rising by 2.2% on average. April was the next best month, with an average increase of 1.9%.

Average stockmarket gains by month since 1987

 

Source: Schroders. Thomson Reuters Datastream data for FTSE 100, S&P 500, MSCI World and Eurostoxx 50 correct as at 21 November 2017. Represents an average of the four indices. This material is not intended to provide advice of any kind. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Past performance is not a guide to future returns and may not be repeated.

Why have stockmarkets performed better in December?

There is much speculation on why stockmarkets tend to rise at this time of the year during what is also called the “December effect”. One theory is based around investor psychology. There is, perhaps, more goodwill cheer in the markets due to the holiday season putting investors in a positive mood, which drives more buying than selling.

Another view is that fund managers, which account for a substantial part of share ownership, are re-balancing portfolios ahead of the year-end.

The danger of superstitions

Stockmarket superstitions are true…until they fail to be. Those looking to gamble simply on Santa spreading his goodwill around the markets again this year do so at their own risk. Just because it’s happened before, doesn’t mean the patterns will be repeated.

In fact, trying to time markets at all is a questionable strategy as it is impossible to predict short-term movements in the market.

As the chart below shows investing should be for the long-term - not just for Christmas.

For instance, the S&P 500 has grown 7.9% annually since 31 December 1986. The worst growth rate among the indices analysed was the FTSE 100, which grew by an average of 4.9% a year.

That means if you were a UK investor who invested a notional £1,000 in the FTSE 100 in 1986 and left the money alone for the next 31 years, your investment would now theoretically be worth £4,463.

Please remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Annualised growth rates for stockmarkets: 1987-2017

 

Source: Schroders. Thomson Reuters Datastream data for FTSE 100, S&P 500, MSCI World and Eurostoxx 50 correct as at 21 November 2017. Growth rate calculated between 31 December 1986 and 31 October 2017. This material is not intended to provide advice of any kind. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Past performance is not a guide to future returns and may not be repeated.</p

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