There’s a lot to look forward to in the lead-up to Christmas. Twinkling lights, merry songs, the joy of celebrating with friends and loved ones, and of course the giving and receiving of Christmas gifts. For investors in particular, there can also be a lot to look forward to during this season – because of what’s known as the ‘year-end rally’.
This is a phenomenon whereby prices often rise on the stock markets towards the end of the calendar year – specifically over the last five trading days of the year and the first two market days of the new year. Sometimes known as the “Santa Claus rally”, this bullish sentiment is in truth only partly attributable to any notion of galloping reindeer. According to Julius Baer’s technical analysts, it would be better to think of it more broadly in terms of the fact that the market performs better during midwinter in the northern hemisphere than at any other time.
Chris-myth, or reality?
Statistics from the past 70 years show that markets – and that means almost all equity markets from the HangSeng in Hong Kong to the DAX in Germany and the S&P 500 in the US – have done better in the later months of the year than the middle months.
What’s more, there’s a big difference in winter returns when the market is experiencing an uptrend compared to a downtrend. Take the S&P 500 for example, in uptrends, when markets have seen 12 months of positive momentum, the index has historically risen by 19.8 per cent. Compare that to a decline of 1.46 per cent when markets have been in a downtrend.
The feel-good factor
So why does this happen? Basically, it’s down to an interplay of a number of different reasons. Let’s start with the great intangible of equity performance: market sentiment. The good spirits that most of us feel in the weeks before Christmas spill over into the stock market, too. Generally, we feel better at this time of year, and perhaps many of us have received a year-end bonus in our pay packets, which translates into increased spending.
What’s more, if we look back a few months to summertime in the northern hemisphere, most of us are more focused on slapping on the suncream and taking to the beaches than focusing on ups and downs on the exchanges. And the same applies to traders. As a result, the market is a little quieter and more relaxed.
As we head into autumn, from October onwards, activity begins to pick up as we increase our spending – think Black Friday or Thanksgiving in November or Christmas shopping in December – and this greater willingness to reach into one’s pockets injects new optimism about the economy and boosts investor confidence. Companies in sectors as varied as retail, travel, tech and even food and beverage generally all benefit from consumer spending and an accompanying shot in the arm for their stock prices, which in turn means investors anticipate better earnings reports. In other words, Santa’s sleighbells herald a virtuous cycle on the markets.
Institutional investors fill their stockings
The year-end also tends to increase volumes. To take advantage of tax opportunities, investors may sell underperforming stocks to offset capital gains taxes, usually earlier in December. At the same time, institutional investors – those large-scale investors like pension funds or insurance companies who exert a major influence on the market – tend to adjust their portfolios by buying high-performing stocks to boost their year-end statements.
Of course, the turn of the year is also traditionally a time for looking ahead. If investors feel optimistic about the next 12 months, perhaps due to improving economic conditions, anticipated interest rate cuts or positive geopolitical developments, their positivity can also send the markets higher.
As seasoned investors know, for every general rule of investing, there’s almost always an exception, and it’s important to remember that year-end rallies don’t come to pass every year. Looking back over the last quarter of a century, for example, investors didn’t feel any festive cheer on the markets following the bursting of the dot-com bubble in 2000, in the aftermath of the global financial crisis in 2008, or more recently in 2022 when the global economy was still not back to full health after the Covid pandemic.
What’s the best advice to rally round at this time of year?
Nevertheless, the interplay of factors around the year-end undoubtedly creates a special market environment. As Christmas approaches, how can you capitalise on any upturn in the markets? Season in, season out, the same advice applies: time in the market beats timing the market. To benefit from the year-end rally, you have to be invested. If not, you run the risk of missing the first and often crucial days of the Christmas crescendo. Remind yourself of your investment goals, cut out the noise and enjoy the holiday season.