Santa Claus is coming to trade.
It may only be early November, but already some traders are preparing for the annual ‘Santa Rally’ –a 4-6-week period in which stock markets have a statistical tendency to trend higher into year end.
Over the past 21 years, global indices – including the UK’s blue-chip FTSE 100 index – have enjoyed the beneficial market conditions, with the latter trading higher on 18 occasions in the past 25 years.
This report will reveal more facts and figures about the Santa Rally, including the best stocks to trade and their potential returns, based on historical data.
What is a Santa Rally & why does it occur?
The ‘Santa Rally’ is the period leading up to Christmas and the New Year in which stocks tend to rally. This peculiar phenomenon has been identified as a regular occurrence over the decades, taking place on numerous occasions, including in 2016.
Whilst there is no guarantee that the stock market will rally in the run up to Christmas, there are several theories that can explain the conditions that cause equities to rally during these final weeks of the year.
- Fund managers cut underperforming stocks while bolstering positions in top-performing stocks to improve year-end return figures to show next year’s prospective clients.
- This ‘window-dressing’, alongside reduced trading volumes as traders go on holiday, lends itself to the hoarding of the best stocks, leading to greater than average share price movements over the period.
Will 2017 be another up year?
This year, the FTSE 100 has underperformed peers year-to-date (YTD). However, in 18 of the past 25 years, the UK’s blue-chip index has rallied on average 2.4% in the final eight weeks of the year. Could 2017 see the 19th rally to help the FTSE play catch up?
The underperformance has come amid a tricky 2017 for UK equities. The triggering of Article 50 in March began the 2-year Brexit process and, so far, things haven’t been going as quite as promised. An unwillingness to compromise has left both teams at an impasse, although both the UK and EU remain optimistic a deal can be reached.
Similarly, central banks have been a key driver of sentiment in 2017, however the Bank of England has been slower on the hawkish uptake than the Fed or ECB. Following its first interest rate hike in 10 years, is the BoE finally riding the wave as the others?
How could this underperformance be reversed?
London Stock Exchange data shows 34% of FTSE 100 companies are currently trading lower than at the start of the year, on average trading -11.3% YTD.
However, almost half of these companies are trading offside by less than 10%, whilst two thirds rallied from 5 Nov – 31 Dec in 2016. Might these companies repeat their 2016 performances to boost the FTSE?
In the lead-up to the new year, having a dedicated research service can mean the difference between a happy, profitable Christmas or a disappointing one.
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