The Santa Rally holds that the market is strong at the end of the year (around Christmas). Is this true?
The market is strong in December
The following chart shows the average returns of the FTSE 100 Index for each of the 12 months for the period 1980-2014.
Over this period the average return of the FTSE 100 Index in December has been 2.0% (the second strongest average month return after April).
OK, so the average return in December is high, but is this attributable to just a few strong years?
To answer this, the following chart plots the proportion of December month returns that were positive over the same period (1980-2015).
By this measure, December is the strongest month in the year for the FTSE 100. In the 35 years since 1980, the Index has risen in 28 years (80%).
The market strength in December can be seen in more detail in the following chart, which plots the actual return of of the FTSE 100 for each December since 1980.
The Index has only fallen significantly in December in four years since 1980. Until last year (2014), the Index had been on an 11-year winning streak.
When does the Santa Rally start?
So, December is strong for the FTSE 100. But is it possible to determine more precisely when the Santa Rally starts?
The following chart plots the cumulative average daily return of the Index throughout the year (more information about this chart).
On average the UK market is strong from the start of November (this is a feature of the Sell in May effect). But we can also see an acceleration of the market at the very end of the year. To analyse this further the following chart plots the cumulative average daily return of the Index for December (i.e. the same chart as the above, but zoomed in on December).
From this we can see that, on average, the market is flat for the first 10 trading days of December, after which it rises strongly. So, we can say that the Santa Rally starts on the 10th trading day of December.
How has this played out in recent years?
The following chart plots the FTSE 100 Index for the last two months of each year for the ten years since 2005. (The index values have been re-based to all start at 100.) The shaded area to the right indicates the final two weeks of the year.
Yes, it’s something of a mess. So perhaps we can’t draw any strong conclusions. However, one can observe a slight tendency in most years for the market to rise in the final fortnight.
What is the cause of the Santa Rally?
Short answer: we don’t know?
There is no definitive explanation for this effect. Although various reasons have been proposed, including: fund managers window dressing their portfolios, positive sentiment in the market caused by the festive season which is accentuated by low trading volumes, anticipation of the January Effect, and tax reasons (NB. “tax reasons” are often cited in the absence of any definitive explanation).
- The UK stock market does tend to be strong in December (although it wasn’t in 2014).
- Stocks accelerate upwards from the tenth trading of December (which in 2015 will be 14th December). It is this last hurrah of the market – in the final fortnight – that can be called the Santa Rally.