Will a Santa Rally make 2017 a record year?

Could 2017 be the year when every single month went well for investors? Jason Hollands, managing director at Tilney Group, gives his view on the so-called Santa Rally.

Will a Santa Rally make 2017 a record year?

With the start of December just a day away, the festive season will soon be in full swing. From an investment perspective however, the key question is how much longer the partying will continue to go on as 2017 has already shaped up to be an incredible year of double-digit returns across most stock markets.

Significantly, if the S&P 500 Index of leading US shares manages to end the week delivering a positive total return for November (which it is on track to do), this will represent a record-breaking streak of 13 consecutive months of positive returns – the longest unbroken run of consistent gains across 90 years of data.

Could 2017 be the year when every single month went well for investors? It is certainly a tantalising possibility and one which observers of seasonal trends in stock markets might have good reason to feel optimistic about. That’s because of a phenomenon known as the “Santa Rally” whereby markets have a high incidence of delivering positive returns during December.

We have studied the total return data for the FTSE 100 Index in December over 30-years and found the month has delivered a positive return a staggering 87% of the time. Of the years it produced a negative return – 1994, 2002, 2014 and 2015 – it only delivered a negative return of more than 5% on a single occasion (in 2002 there was a negative return of -5.39).

In contrast there have been seven separate occasions where the FTSE 100 posted stellar total returns of over 5% (1987, 1989, 1993, 1997, 1999, 2010 and 2016), with 1993 posting the best return of 8.24%.

The S&P 500 has similarly posted a positive return in December 83% of the time over the past 30 years, with only 2002 delivering a negative return of more than 5% of -5.87%, whilst its strongest year was 1991 where it posted a barnstorming 11.44%.

Statistically speaking, the Santa rally is a very convincing phenomenon although the reasons why the markets have a tendency to end the year on a high are a source of much debate. Optimism about end of year bonuses and general Christmas cheer driving markets higher seem a little tenuous, with more technical theories suggesting that momentum in the markets may be down to fund managers “window dressing” their portfolios with stocks that have performed well and reducing cash weightings ahead of reporting periods to clients.

Another factor could be hedge funds closing down short positions that have not played out as expected, forcing them to buy back shares and return them to the institutions who lent the shares to them.

With stock markets currently riding high and market volatility as calm as a duck pond, there is every possibility of yet another good month this December. Potential upsets to this cheery scenario include another nuclear test by North Korea or a major set-back in the planned overhaul of the US tax code, which President Trump and Republican Congressional leaders hope to achieve by Christmas.

Optimism about US tax cuts is high but this is contingent on a handful of Republican senators who have yet to commit to support the legislation. Significant tax cuts are the cornerstone of President Trump’s pro-growth agenda and expectations of these have been partially factored into spiralling US share prices, where valuations appear expensive on most measures. A failure to deliver in this area could take the wind out of the sails for US equities.

In truth though, it is nigh impossible to predict short-term market setbacks and it is better for investors to stay focused on their long-term objectives. While US shares do look expensive compared to historical trend, a large part of this is down to sharp rises in technology company shares which now collectively account for around 23% of the S&P 500 Index.

In contrast UK equities appear fair value and continue to offer attractive dividend yields, the outlook for European companies is positive with strong earnings momentum and for value hunters Global Emerging Market shares are still trading well below longer term trend despite a strong year of share price returns.

 

Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest and tax policies may change.

 

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