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Will there be a Santa Rally in December 2021?

By Angelique Ruzicka

03:00, 6 December 2021

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Photo of figure with Santa hat, striped top and red braces holding cash fan in hand
There’s a 50-50 chance markets will go up despite the growing threat from the Omicron Covid-19 strain – Photo: Shutterstock

The yearly speculation around the Santa Rally is as traditional as mince pies and mulled wine. But what are the chances of stocks going up this month given all the news we’re hearing about Omicron, the latest Covid-19 variant? We spoke to a number of investment experts to get their thoughts.

Chances of a Santa Rally are still good if you look at the historical data. “Historical data implies that the chance for a Santa Rally is 50:50,” points out Alexander Voigt, founder and CEO at daytradingz.com. “Between 1993 and 2020, the S&P 500 increased over the last ten trading days of the year in 14 cases, while 14 times the S&P 500 declined in that period.”

But what exactly is a Santa Rally and where are traders likely to see gains? Grab a mince pie and read on!

What is a Santa Rally?

The ‘Santa Claus Rally’ term was first coined by stock market analyst Yale Hirsch in 1972. If markets go up in the last few weeks of December, then this is typically referred to as a ‘Santa Rally’.

A Santa Rally is usually driven by retail activity. Jason Hollands, managing director of Bestinvest, adds: “Explanations as to why stock markets tend to do well in December include the markets getting a boost as professional fund managers position for the year ahead, investing any spare cash in their funds to ‘window dress’ their portfolios ahead of reporting periods.

“Another is that hedge funds who take negative bets on companies – known as ‘short positions’ – close out some of these positions before the year end, which requires them to buy shares that they have previously sold. Of course, it could just be a case of seasonal cheer and the magic of the festive season!”

Is it a myth?

Some believe a Santa Rally is as mythical as the man in red himself. “The Santa Rally is a myth,” argues Clayton Quamme, partner and financial advisor at AP Wealth Management. “You don’t have to look back far to find examples of this. December 2018 was a very rough month for the stock market. The S&P 500 fell 11% in December 2018. The market just kept going down all month long. Even Santa could not turn it around.”

But Hollands contends it’s not a myth if you look at data from further back. “Far from being a myth, we found compelling evidence to support the idea of a ‘Santa Rally’,” he says. “Looking at forty years of monthly market data, December has the highest incidence of any month in providing investors with positive returns both globally and in the UK.

“Global equities have delivered positive returns 80% of the time in the month of December over this period, far higher than any other month. And when it comes to the UK stock market, this success rate is even more pronounced, with December delivering positive returns 83% of the time,” Hollands adds.

US100

12,499.70 Price
-1.600% 1D Chg, %
Long position overnight fee -0.0192%
Short position overnight fee 0.0077%
Overnight fee time 22:00 (UTC)
Spread 1.8

Natural Gas

2.45 Price
-6.780% 1D Chg, %
Long position overnight fee -0.1231%
Short position overnight fee 0.0870%
Overnight fee time 22:00 (UTC)
Spread 0.005

BTC/USD

22,863.75 Price
-1.410% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 22:00 (UTC)
Spread 60.00

XRP/USD

0.40 Price
-1.180% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 22:00 (UTC)
Spread 0.00372

What’s the impact of Omicron on markets?

There have been some stockmarket wobbles recently as the market digests the news of the latest Covid-19 variant Omicron, and what that could mean. But there are other things that could make markets skittish too, and this may not be a bad thing.

“Financial markets and the global economy are going into this period with a degree of nervousness, with a new Covid strain and the potential for momentous central bank decisions set to drive further volatility,” says Shafiq Shabir, head of electronic trading at Intertrader.

“Reactions to these new developments might provide opportunities for traders to find value and boost their position for the end of the year, as many will draw back from the recent bullishness across markets and look to rebalance portfolios for 2022,” he adds.

“Omicron is threatening to be the coal in traders’ stockings this year, but with a peak-pandemic rally last December and the disappointment of 2018 still fresh in memories, it shows there are complex drivers behind this festive tradition. Traders should be ready for a few more weeks of uncertainty, but they might yet find good tidings in time for Christmas.”

Where should you invest?

When you consider the trends, investing in global equities tends to be a good place to be in the month of December. Bestinvest analysis shows that global equities have delivered an average capital return of 1.68% in the month of December over the last forty years, rising to 1.85% when reinvested dividends are also considered.

Hollands is reluctant to give a view on which stocks specifically could do well this month but for traders he offers this advice: “If you’re someone who likes investing in individual securities rather than funds, then you should do some on the basis of fundamentals: buy great companies on reasonable valuations.

“In an environment of above-trend inflation and the prospect of rising rates, financials typically prove resilient – banks to consider are Bank of America (BAC) and NatWest (NWG) in the UK. Infrastructure is also a major theme globally and in the UK – one way to tap into this is construction materials firm CRH plc (CRH).”

The final word goes to Andrew Wang, managing partner at Runnymede Capital Management: “Most retail investors are better off taking a long-term view on their investments rather than attempting to anticipate very short-term market moves,” he says.

Read more: Schroders predicts growth for US and European stocks in 2022

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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