15th December 2014
So far in December, the UK market has been anything but full of Christmas cheer with the so-called Santa Rally remaining very much elusive.
To date December has been a terrible month for investors with the FTSE All Share down by close to 6%.
History however suggests that the so-called Santa Rally does exist, and that December is typically a good month to invest.
For example, research from fund broker Hargreaves Lansdown highlighted that the UK market rises 87% of the time in December, achieving an average return of 2.6%.
In fact £10,000 would be worth £21,600 today if invested for every December since 1984, although if left be throughout the entire period it would now be valued at £186,100.
Laith Khalaf, senior analyst, Hargreaves Lansdown said: “The ring of sleigh bells is notably absent from the UK market so far in December, and any rally has to overcome significant negative sentiment. Statistically the Santa Rally is as hard to dismiss as it is to explain, however investors would be better served by staying in the market for the long term, rather than playing the hokey-cokey with their money on a monthly basis.”
Currently the UK market looks decent value if you consider long-term company earnings noted Khalaf. But in the short term the UK election is likely to add some volatility. He said: “However longer term a lower oil price will gradually put more money into the pockets of consumers and many businesses, which could provide a boost to economic activity, and corporate profits outside of the oil production sector.”
Looking at monthly performance of the FTSE All Share since 1984, December comes out as the most attractive month for the stockmarket. The UK market has risen nine years out of every 10 in December, with an average return of 2.6%.
The next best month is April, when the market has risen three out of every four years, with an average return of 2.2% showed the Hargreaves Lansdown statistics.
The worst month statistically is June, where the market has fallen more often than it has risen, ending in positive territory only 43% of the time. The average return in this month is -0.7%.
The numbers clearly back up the existence of a Santa Rally, but is there any rational explanation of this phenomenon? A number of unsatisfactory suggestions have been put forward, such as people investing their Christmas bonuses and fund managers replacing losing stocks with winners before publication of year-end accounts.
Khalf added: “Before you start to get too carried away, and decide to only invest for one month each year in December, don’t overlook the positive impact of being invested for the rest of the year.
“The moral of the story is investments are not just for Christmas, and savers would be well-advised not to play the hokey-cokey with their money on a monthly basis.”