Will the Santa rally really come this year?

17th December 2013

Rob Morgan, pension and investment analyst at Charles Stanley is sceptical about the prospects for the Santa rally this year and says that if there is one it may be muted.

In a note issued this week, he asks what odds this year ends with a “Santa rally” the phenomenon note which defies expectations?

“Whatever the reason, following such a good year for most markets can we really expect a further boost to returns at the year end? The FTSE 100 is up 16% year to date, including dividends reinvested, and so far the only losing months were June, August and November (Source for data: FE Analytics 01/01/13 to 01/12/13). Often Santa rallies seem to make up for poor patches earlier in the year – but this can’t be said for 2013.

“Continuing the theme of the year, much hinges on the meeting of the US Federal Reserve this week. Many investors are still expecting the Fed to delay scaling back its $85-billion-a-month quantitative easing (QE) until early next year. Yet recent stronger economic data and mild inflation figures suggest a December move is possible, and market opinion is currently sharply divided.”

Morgan says that this raises the question of whether tapering is actually a bad thing? “With interest rates still expected to be a long way off rising, and with data improving, perhaps the economy can absorb a scaling back of stimulus? It is unlikely markets will see it this way though. Banks are still cleaning up and shrinking their balance sheets meaning QE still plays a crucial role in providing liquidity in the economy – a key reason why tapering of QE will occur later rather than sooner in my view.

“Certainly to me it seems unlikely the Fed will move this month. Outgoing chair of the Federal Reserve Ben Bernanke will probably not want to taper before he officially leaves office and Janet Yellen, the new chair, also seems inclined to leave QE full on at full speed. So we could be in for something of a relief rally into the year end rather than a “taper tantrum” if the news disappoints.

“However, following such a strong period for equity markets I would be surprised to see anything other than a muted seasonal rally. Even if we see a flat end to the year equity investors (with some notable exceptions such as emerging markets) should be pleased with returns in 2013 – though maybe I’m just a Scrooge!”

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