Young children aren’t alone in wanting Santa Claus to arrive this year – investors are also keeping their fingers firmly crossed that he’ll make an appearance.
Of course, their hopes are more focused on stock markets enjoying a festive boost than a bearded man emerging from the chimney bearing presents.
This supposed uptick in returns is referred to as the ‘Santa Claus rally’ and is widely viewed as taking place during the last trading week of December and the first two days of the new year.
It’s thought that the phrase was first coined in the early 1970s by Yale Hirsch, who created the Stock Trader’s Almanac to share views on trades and investments. The actual phrase in the publication, read: “If Santa Claus should fail to call, bears may come to Broad and Wall.”
According to Yale’s son, Jeff, who has taken over as the Almanac’s editor, the rally begins as the market opens on Christmas Eve day – December 24th. “This is our first indicator for the market in the New Year,” he wrote. “Years when the Santa Claus Rally has failed to materialise are often flat or down.”
Considering the sheer number of investment myths and legends that do the rounds, the most obvious question to ask is: Does the Santa Rally actually exist?
Well, the answer appears to be yes, according to an analysis by Schroders, which found US stocks have recorded a positive return in 77.9% of Decembers since 1926.
Using data attributed to Morningstar Direct, the fund management group suggested stock prices returned an average of 1.6% during the final month of the year. It also discovered that December was one of the most prosperous periods for stocks and had by far the highest probability of positive returns out of the 12 months of the year.
Does the Santa Claus rally story stack up in the UK, too? Tom Stevenson, investment director, personal investing, at Fidelity International, agrees that the run-up to Christmas is traditionally positive for UK markets.
“Shares have risen in 25 of the past 30 Decembers here in the UK,” he said. However, he quickly added a note of caution for those earmarking bumper returns. “It’s a brave call to bet on a 26th positive reading this time,” he said. “But who knows? The markets are certainly looking oversold.”
According to IG.com, which analysed various time periods for both the FTSE and S&P from 1986 to 2015, the biggest rises on both indices typically occurred on the 14th, 15th and 16th of December.
“Overall, investing from these dates brought an average annual return of 2.53%, and a positive return 87% of the time,” it stated. “In contrast, investing over the first half of the month yielded an average loss of -0.23%.”
This is the million-dollar question. No-one knows for sure, although there are plenty of theories as to why stock prices may rise during this period.
The first is simply seasonal goodwill, with the idea being that investors feel more buoyant and confident about investing at this time of the year. Others suggest that fund managers rebalancing their portfolios before the end of the year is a contributing factor to the December increases, along with the possibility that people are looking to invest their early annual bonuses.
The sheer number of potential problems and uncertainties that have been swirling around markets over the past couple of years clearly puts this year’s visit from Santa in doubt.
Top of his naughty list is clearly the Omicron variant of Covid-19. Its rapid spread around the world has already caused a tightening of restrictions.
In the UK, for example, masks are now compulsory in many indoor venues, while Prime Minister Boris Johnson has encouraged people to work from home if possible. These factors may have contributed to the 1.7% fall in the FTSE 100 index – from 7,362.12 points to 7,235.92 – in the month to December 13th 2021.
The reality is that no-one knows whether the Santa Rally will still occur this year, but what funds could be worth considering if stocks do rise as hoped?
Of course, this depends on where you want exposure. If it’s to North America, which has been a strong performer during 2021, then T. Rowe Price US Large Cap Growth Equity is a contender.
This fund, which has been managed by Taymour Tamaddon since 2017, invests in a diversified portfolio of shares from large capitalisation US companies. Stock names chosen for the fund, which was launched back in 2003, have the potential for above-average and sustainable rates of earnings growth.
The fund is packed full of large companies, including technology giants Alphabet, Microsoft and Apple, as well as Amazon.com, Visa and Intuit*.
According to Taymour, the “trajectory of equity markets” heading into 2022 depends on several competing crosscurrents, which he believes creates a wide range of potential outcomes. “With elevated multiples across much of the market, we are staying mindful of valuations given the risk for rate hikes and multiple contraction,” he said.
For those wanting more of a focus on the UK market, the Ninety One UK Alpha fund primarily invests in UK company shares. It aims to provide capital growth and income over at least five years.
The largest holdings in the portfolios, which is run by Simon Brazier, include a string of international household names in a wide variety of sectors. They include oil giants BP and Royal Dutch Shell, pharmaceutical company GlaxoSmithKline and media group Ascential, as well as consumer goods firms Unilever and Reckitt Benckiser**.
In his most recent quarterly review, Simon said he believed the portfolio to be well balanced given the uncertain outlook. “We continue to apply our diversified approach, and the UK Alpha portfolio remains focused on those companies that can navigate a world of geopolitical stress, economic uncertainty and structural change,” he added.
For those with an even more international focus, there is the JOHCM Global Opportunities fund, which can invest in any company across the globe. The portfolio, which is managed by Bey Leyland, has a strong bias towards larger and medium-sized multinational businesses.
It aims to generate long-term capital and income growth through a concentrated portfolio of global equities and has exposure to a wide range of sectors.
According to the most recent fund factsheet, the top 20 holdings include French healthcare business Sanofi; cigarette and tobacco giant Philip Morris International; and Iberdrola, the Spanish utility*.
“Trying to time the market is an impossible task, but as bottom-up investors we can take steps to prepare by ensuring that we have maximum conviction in the quality, growth and margin of safety in the portfolio,” said Ben.
*Source: fund factsheet, 31 October 2021
**Source: fund factsheet, 30 November 2021
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.