The end of the year is fast approaching and now is an excellent time for traders – both bullish and bearish - to consider what December and January may have in store for their financial portfolios.
Analysing historical data going back over three decades, we have noted that December often sees a stock market rally to cap the end of the trading year.
Our data shows that the FTSE has one of the best December hit rates over the past 34 years; it was up a whopping 27 years/79%, for an average 2.4% rise. With the blue-chip index -8.2% year-to-date, is there potential for yet another December catch-up?
Fuelling this trend is the phenomenon of window dressing, where fund managers get rid of underperformers and rush to buy the year’s outperformers to flatter the end-of-year statements sent to investors. This often creates a “Santa Rally”.
A similar school of thought, known as the “January Effect”, holds that the prior year’s laggards tend to do well in the first month of the year. Bargain-hunting fund managers, aiming to beat the market and outperform peers, seek out stocks at low prices. When other traders follow suit, these stocks can rally and the recovery gains momentum that pays off.
With these theories in mind, we have analysed the 12 worst performing stocks year-to-date on both the FTSE 100 and FTSE 250 to assess which of them have the best potential for a 2019 recovery and might brighten your gift basket come Christmas.
Why have these stocks lost ground in 2018?
There are a host of reasons that have sent these prices of these shares lower. Markets are off their Spring highs on concerns that a Tech-led rally has peaked and lingering US-China trade worries. Brexit and geopolitical uncertainty have been an obvious hindrance. Whilst a weak GBP has benefited some shares, a reciprocally stronger USD has been a headwind for others, itself a result of rising bond yields as US interest rates rise and the end of cheap money creeps closer everywhere else.
The frequency of profits warnings has also risen, with companies finding it more difficult to hit targets. The advantage of this for investors is that companies may be less likely to aim too high next time, not wanting to disappoint again, meaning the next set of results could impress and help shares recover faster.
Are these stocks set to recover?
There are several reasons for some of the worst performing FTSE 100 and 250 stocks to see a share price recovery over the next two months. In the case of the FTSE 100, many of the names languishing at the bottom of the performance tables are multi-billion-pound stalwarts of the UK blue-chip index and, in some cases, recognisable household names. After a year of underperformance, management will surely be focused on turning the tide of sentiment in favour of a share price rally.
Don’t forget many also have high dividend yields (in some cases very high after those share price falls) which should maintain interest in the shares, offering near-term support, and possibly even the recovery momentum those fund managers are looking for. Can these companies put a tough 2018 behind them, start the new year on the front foot? Could they even rally into year end?
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