Interactive Investor

The Stockmarket in December: Santa Rally to bring festive cheer

1st December 2015 09:10

Stephen Eckett from ii contributor

Towards the end of the year, there seems to be an inverse relationship between the weather and the stockmarket. In December, as temperatures get colder, shares get hotter. Since 1970, the FTSE All-Share index has risen in 76% of all years, with an average monthly return of 2.2%.

Incredibly, the index has only fallen five times in December since 1984, and in only one of those years was the decline significant. As it happens, the market did fall in December 2014, but it is a rare event. As a consequence December is the strongest month in the year for shares.

Given the general strength of the market in December, an odd feature of the month is that it has the weakest first trading day for any month in the year - average first day returns have been -0.07%, with a probability of a positive return a lowly 45%.

After this first trading day, on average the market tends to increase gently in the first two weeks of the month - but then rises strongly in the final two weeks. Indeed, this is the strongest fortnight in the whole year, with the three strongest days of the year all occurring in it.

(click to enlarge)

The santa rally

This final spurt in share prices at the end of the year is sometimes called the Christmas or Santa Rally.

However, there is no common agreement on exactly when the rally starts - some say it covers the whole of December, while others (and the data tends to back this up) say it's just the final week of the year. In recent years there has been some sign that shares have started rising as early as November in anticipation of the Christmas Rally.

But December is a very quiet month for company results: only three FTSE 100 companies release their preliminaries (finals) and three their interims this month, leaving some breathing space for company analysts.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.