Will there be a Santa Rally this year?

Santa Rally

December is historically the best month for the UK stock market, making a positive return 86% of the time. The average return for the FTSE All-Share in December is 2.6%, compared to the average return across all months of 0.9% (based on returns over the last 30 years).

£10,000 invested in the UK stock market 30 years ago would now be worth £152,500, with dividends reinvested. However if you weren’t invested in December each year this would be worth £72,800, almost £80,000 less.

However things don’t look quite as rosy in December in years when the stock market has fallen over the previous 11 months. In these years the stock market rises only 63% of the time in December.

Conversely in years when the market has risen over the 11 months to up to December, the stock market rises in December 95% of the time.

Given the volatility and negative sentiment we have seen in the market this year, it may come as a surprise to learn that 2015 falls into the latter category, as the UK stock market has returned over 2% since the beginning of this year.

The ‘Easter Rally’

April is the next best month of the year after December, with the market rising 77% of the time, with an average return of 2.3%, so there seems to be an Easter Rally too.

June and September are both bogey months for the UK stock market. June is the only month of the year which registers losses more often than gains, producing a profit only 43% of the time. The average return in June is -0.7 %.

September just about scrapes a positive success rate, with the stock market rising 52% of the time. However where losses have occurred they have been heavier than in June, so overall the average return is lower at -0.9%.

October has a bad reputation for being a bit ‘crashy’, and history bears this out to some extent. The collapse of Lehman Brothers prompted the UK stock market to fall 12% in October 2008, and in the eponymous crash of 1987, 26% was wiped off the stock market in October, the worst performance in any month by quite some margin.

Nonetheless on average October is a decent month to be invested, rising 72% of the time with an average return of 0.6%.

Why is there a Santa Rally?

A number of theories have been put forward to explain the Santa Rally over the years, none of which are particularly enlightening.

Theory 1:  People invest their Christmas bonuses – a nice idea which probably credits us with a superhuman level of prudence.

Theory 2: Fund managers engage in ‘window dressing’ – selling losers and buying winners so their end of year accounts publish a list of what looks like the year’s best stock picks. However in practice this would probably raise some pretty awkward questions for under-performing fund managers, i.e. why has your fund performed so badly when you hold so many winning stocks?!!

Theory 3: Investors feel more optimistic than usual – an outbreak of good cheer. Perhaps the best explanation we have without being particularly scientific.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown:

Stock market history suggests Santa really does deliver gifts to investors in December with surprising regularity. Looking back over the last thirty years, December has been the best month for UK shares, which have risen almost nine times out of every ten years.

Our analysis hints that the Santa Rally does somewhat depend on whether the stock market has been bad or good though. In years like 2015 when the stock market has already risen, there is a higher chance December will follow suit and post a positive return.’