Investors could bag themselves a better Christmas present than socks or an Adele CD by putting money into the stock market at the start of December, if history is a guide.
The so-called Santa rally, in which shares do well at the end of the year, is backed up by a surprising amount of evidence, but there is less agreement on the cause of the trend.
Research by the stockbroker Hargreaves Lansdown shows that December has been the best month for the stock market in the past 30 years. British shares have risen in December almost nine times in 10 in and the average return was almost three times that for all months of the year.
If someone invested £10,000 in the British stock market 30 years ago and reinvested dividends, the stake would be worth £152,500 today – but pulling out each December would have reduced that by almost £80,000, Hargreaves Lansdown found.
Laith Khalaf, an analyst at Hargreaves Lansdown, said: “Stock market history suggests Santa really does deliver gifts to investors in December with surprising regularity. Investors should certainly not be investing for just one month, but for those who are currently thinking of investing in the stock market, history indicates they stand a good chance of getting off to a good start.”
There are various theories about why share indices tend to rise in December, as they did last year. These include “window dressing” by fund managers buying the year’s most successful shares to make their portfolios look good and people investing their Christmas bonuses.
Khalaf said window dressing made little sense because clients would ask why the fund manager’s performance did not match the year-end stock picks. The idea that bonuses were invested “probably credits us with a superhuman level of prudence”, he said.
Mike Van Dulken, head of research at the spread betting firm Accendo Markets, said window dressing could take the form of hoarding existing shares that had done well, pushing up prices. Thin trading as the City wound down for Christmas could also exaggerate rises, he said.
Santa rallies are starting earlier each year, according to Van Dulken. His firm published a report alerting clients to the trend in early November to make sure they had time to digest the idea. “I believe in the phenomenon. Each year we have published our piece earlier and earlier because it’s becoming a self-fulfilling thing with retail investors buying into the concept,” he said.
After a volatile year, the FTSE All-Share index is up more than 4% since mid-November. Van Dulken said gains could have further to go but this December is unusual because the US Federal Reserve was expected to start increasing interest rates after almost seven years close to zero.
Markets have tended to react badly to signs that US rates would rise but fears may have been assuaged, he said. “We’ve been teed up for it for so long now and people are maybe waiting for it to happen to say: ‘There are no negative surprises – let’s carry on’,” he added.
The top-performing share in Santa rallies since 2001 was CRH, the building materials company, which had risen in the last two months of the year in all but two years with an average gain of 10.8%, Accendo found. Other strong performers have included Unilever and WPP, though past trends do not indicate future performance.
Khalaf argues that the most likely reason for the Santa rally is a general feeling of good cheer as the festive season takes hold. “No one can really explain this seasonal phenomenon, so don’t be too surprised if it turns out to be one of those years when Santa stays in his grotto,” he said.
