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18 December 2020

Will Santa Deliver this Year?

With such a tumultuous 2020 behind us, the wish list of many goes little beyond a plea for normality this Christmas. But, as always during the festive period, investors 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. And, just like inquisitive children, investors ask if the Santa Rally is real? Well, the answer is that history demonstrates that it is indeed a real phenomenon; over the last 36 years of data, December has produced the highest average monthly gains of any other month, posting an average 2.2% gain since the Index was launched in 1984. April has been the only other month to average over 1% in the same period.

Though shrouded in mystery, like Santa himself, there are some rational explanations for the occurrence: trading volumes are thin during the holiday period, causing the demand-supply forces to push up a reduced buying stock; 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.

In global markets there is cause for confidence in Santa’s return. News of the vaccine roll-out has injected investors with optimism for a re-opened economy in 2021. In fact, regions like China are already demonstrating positive signs that the ‘factory of the world’ is back up and running - even sprinting to a strong recovery.

Here in the UK, we have the small matter of Brexit to deal with. At the time of writing, the stalemate between the UK and Brussels continues to push hopes of a deal into the grave. Having said this, negotiations are known for going to the wire and this one is particularly fraught, with the interest of both sides invested in some form of agreement. We expect Santa to be putting both European and UK listed stocks to the top of the nice list if negotiators can nail down the sticking points, though regardless of the outcome, businesses of all scales are craving certainty, good, or bad.

Despite these caveats, history is on the side of investors, particularly those wishing to gamble on positive Brexit news, while the vaccine rollout will continue to yield positive headlines throughout the festive period. The good news for investors looking to play the rally is that there are plenty of trading days following any announcement for those prepared to jump in. Investors are likely to be hoping that both politics and Santa deliver this Christmas.
 
Will Santa Deliver this Year?

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