Wednesday 18 December 2019 8:59 amSchroders Talk

Is the "Santa Rally" real?

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I am an Investment Specialist at Schroders.

Investors found their festive spirits dampened at the end of 2018. With concerns over the health of the global economy looming large, global stocks fell 13.7 per cent in the final quarter of the year, according to the MSCI World Index.

It wasn’t a merry advent period, indeed it was the worst December for markets in three decades. Bah humbug.

The global index fell 7.7 per cent, crushing any hope of a “Santa Rally” for only the seventh time in the last 32 years.

But although 2018 was miserable, December remains one of the most prosperous months for stocks.

What are the chances of a Santa Rally?

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.

The data shows that global stocks have in fact risen in 78.1 per cent of Decembers since 1987, with stock prices up on average 1.7 per cent, perhaps adding some substance to the “Santa Rally” myth.

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.

Monthly facts and figures

While December has been a consistent month for stocks rising, April is the most prolific.

It matches December for consistency but the average April rise for stocks (2.1 per cent) has been higher over the last three decades.

The next best months were July and November. Stocks have risen 65.6 per cent of the time in both those months, but July boasts a better average rise in stock prices, 1.4 per cent versus 0.7 per cent for November.

June was the worst month for markets, with stocks gaining just 34.4 per cent of time. August was the worst month for stock market performance, when stocks fell an average of -1.1 per cent.

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.

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The shocktober lesson

Investors should note the data for the month of October. It seems to underline 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 per cent 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 per cent 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 per cent.

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 per cent that October. It was the worst monthly performance for stocks globally in six years and it was the tenth worst in the last decade.

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. By selling some better performing stocks managers can afford to buy more of the underperforming ones, pushing up prices.

The danger of superstitions

The dramatic stock market fall in December last year proves two things: past performance can not be relied upon and stock market superstitions are only true until they fail to be.

Stock market history can be fascinating, but it can often lead to assumptions – that Octobers are bad or that you should sell in June because summer months are poor performers.

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

Time in the market

Separately, Schroders’ calculations also showed if in March 2003 you had invested $1,000 in the MSCI World and left the investment alone for the next 15 years it would have been worth $4,211. Figures have not been adjusted for inflation or fees.

However, if you had tried to time your entry in and out of the market during that period and missed out on the index’s 30 best days the same investment would now be worth $1,268, or $2,943 less.

Investors’ best bet is to be patient and give their investment time to grow. The general rule is five years to allow for stock markets to go through their natural cycles.

As with all investing, 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. 

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

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