The “79% chance” the Santa Rally is real

Stock markets have risen in 79% of Decembers over the last three decades adding some substance to the myth of the “Santa Rally”, Windergate research has found.

The “Santa Rally” is a supposed effect of the Christmas feel-good factor, helping stock markets rise at the end of the year, although many seasoned investors remain unconvinced.

It’s unwise to draw firm conclusions from stock market history but in the spirit of festive fun, Schroders analyses the data each year.

Santa’s rally certainly existed in Britain last year: the FTSE 100 rose by 4.9%. But yuletide cheer was less apparent elsewhere. The S&P 500 rose by only 1.0% and the MSCI World index edged up by 1.3%. Only the Eurostoxx 50, a measure of Europe’s biggest stocks fell, down by 1.8%, of the indices we analysed.

But that was just one year. The longer-term picture reflects a pattern. Our analysis found global stock markets, as measured by the MSCI World index, have risen in 79% of Decembers since 1987, making it the best month of the year for stocks on average over the last 32 years.

April was next best with stock markets rising 74.3% of the time followed by October, at 68.6%. June was the worst month with markets rising around a third of the time (36.7%).

Which month has registered the biggest gains?

It has not just been about the frequency of rises in December, but also the size of the gains. Global stock markets have risen by an average of 2.1% in December, since 1987. It is the highest average gain of any month. August has been the worst month, with the stock market index falling by an average of 1%.

To underline this, Schroders analysed the performance of four stock market indices: FTSE 100, S&P 500, MSCI World and Eurostoxx 50 between 31 December 1986 and 31 October 2018. The chart below combines data of those major equities indices to show the frequency with which they rose in each month since 1987.

Investors should note the data for the month of October. It seems to underline the point on the unpredictability of markets.

October has the third highest frequency of gains and the joint third highest average rise. But historically it is also the month that has included some of the biggest stock market falls.

October 1987: Black Monday

On 19 October 1987 global stock markets crashed amid worries about a slowing global economy and high stock valuations. The concerns were compounded by a computer glitch. Global stocks fell on average by 23% in October that year.

October 1997: Asian financial crisis

The Asian financial crisis began in the summer of 1997. A sequence of currency devaluations in Asia rocked global confidence. Global stocks fell by 6.6% in October that year.

October 2008: Global financial crisis

The seeds of the global financial crisis were sown when the US housing market began to collapse in 2007. The full extent wasn’t realised until Lehman Brothers investment bank collapsed in September 2008. The global financial system seized up and a month later global stocks had fallen by more than 15%.

October 2018: Trade wars and rising rates

Investors fretted about issues such as US-China trade tensions, European political uncertainty and the withdrawal of quantitative easing stimulus programmes. Global stocks fell 7.4% in October. It was the worst monthly performance for stocks globally in six years and it was the tenth worst in the last decade.

The chart below again combines data of those major equities indices mentioned above to show the average gains by month in stocks over the last 32 years.

Why have stock markets performed better in December?

There is much speculation as to the reasons for 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

Stock market history can be fascinating, Investors will often instinctively hunt for patterns that might give a clue to the future. These often lead to assumptions – that Octobers are bad or that you should sell in May because summer months are poor performers.

Of course stock market superstitions are only true until they fail to be. Those looking to gamble that Santa’s goodwill will support the market do so at their own risk. Just because it’s been more likely to happen before, doesn’t mean it will again. In fact, trying to time markets at all is a questionable strategy as it is impossible to predict short-term movements in the market.

The chart below suggests the merits of having taken a long-term approach. While there have been many ups and downs, the rise in the S&P 500 index represents an average of 7.8% a year since the start of 1987. The worst average annual rise for the indices analysed was the Eurostoxx 50 at 4.0% a year. The figure for the MSCI World index was 5.6%.

The gains are far more impressive if the income paid to investors had been reinvested. In this scenario, the annual returns for the MSCI World rises to 8.0%.

The FTSE 100 return rises from 4.6% to 8.6% a year, with reinvested income included. A UK investor who invested a notional £1,000 in the FTSE 100 on 31 December 1986 and left the money untouched for 32 years would now theoretically have £14,154, not including the effects of inflation or charges.