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05 December 2019

Will Santa Visit the UK Equity Markets This Christmas?

James Andrews, Director – Head of Investment Management

As we enter the festive period, investors often look to what is affectionately known as the ‘Santa Claus Rally’. This is a stock market rally that frequently occurs during the run-up to Christmas – more specifically defined as the last five trading days of December and the first two of the new year. Investors, just like some inquisitive children, are bound to ask themselves: is Santa real? Well, in this instance, history tells us that the Santa Claus Rally is indeed real, occurring in 25 of the past 30 years.
 
You may be wondering why this phenomenon occurs, and many theories abound: trading volumes are thin due to the holiday period; fund managers tend to rebalance their portfolios heading into the new year; people investing Christmas bonuses; bargain hunting before January (which is known to be a strongly performing month); or indeed seasonal goodwill among the investing community. It is probably a confluence of all these things and somewhat of a self-fulfilling prophesy. Investors expect the market to rise, invest accordingly, and so it does.
 
Last year was one of those rare exceptions, as the combination that has dogged markets throughout 2019 – Brexit and the US-China trade war – weighed on sentiment with fears the global economy was weakening. The FTSE 100 fell 0.5% on Christmas Eve last year as it hit a two-year closing low. The Dow Jones in the US had its worst December since 1932, having fallen by c.12% over the month.
 
This year, however, there is cause for some optimism that Santa will return. Last week saw US stocks rising for a fourth day in a row, seeing the S&P 500 hitting 3153, the Nasdaq Composite rising to 8705 and the Dow Jones climbing to 28164, with all three markets posting fresh intraday record highs. This was after both the recent earnings season and economic data in the US were better than expected as fears of a slowdown in the world’s largest economy receded. Barring a dramatic escalation in the US-China trade war, the US markets look set to finish what has already been a strong year with a rally into the next.
 
Here in the UK, we have the small matter of a general election to contend with, along with the continued effects of Brexit uncertainty. A conclusive outcome to the general election and a firm direction for Brexit are imperative so that UK businesses have more certainty in terms of what future trade terms look like. If polls are to be believed, the Conservatives are set for a majority and this would see the current Brexit deal “getting done” to use Boris Johnson’s election parlance. This should offer markets and businesses some clarity for future direction and see markets rally into the new year.
 
Critics have pointed out that Johnson’s deadline of a trade deal with the EU by December next year is impossibly tight and, therefore, could see the re-emergence of concerns around a hard Brexit, but I would expect markets to leave these concerns in the pile marked ‘deal with next year’. Of nearer-term concern to investors hoping for St Nick’s market delivery is the prospect of either a hung parliament or a Labour win given Mr Corbyn’s more burdensome corporate tax rates and nationalisation standpoint.
 
Despite these caveats, history is on investors’ side as they look for rally number 26, and the momentum in the US markets will be a hard trend for the UK to buck, as will the momentum in the polls for a Conservative majority. The good news for investors looking to play the rally is that there are plenty of trading days post-election day for those prepared to jump in. Investors are likely to be hoping that both politics and Santa deliver this Christmas.
 
Will Santa Visit the UK Equity Markets This Christmas?
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