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History shows the FTSE 100 is heading for a Santa rally

Photo: Public domain.

Christmas is coming and history suggests that investors will be enjoying the festive season. That’s due to a strange but proven phenomenon known as the “Santa rally”, which regularly sees share prices fly higher than a sleigh in a snowstorm. We haven’t had the rally yet, but history suggests it will pop down our chimneys at any moment.

Be of good cheer

You may no longer believe in Father Christmas but there are sound reasons to believe in a Santa rally, according to Adrian Lowcock, investment director at fund managers Architas. “The Santa rally is one of the more statistically robust trends,” he says. “In December the stock market tends to rise gently in the first couple of weeks of the month before the Santa rally takes hold and then the market rises strongly in the last two weeks of the year.”

His figures show that the FTSE 100 has risen an astonishing 26 out of the 32 seasonal periods since 1984, or 81% of the time. On average, it rises 2.3% in December, so Christmas really is a time of good cheer for investors. Lowcock concludes: “The last two weeks of the year are statistically the strongest two-week period of the whole year.” The Santa rally may already be hitching up the reindeer, with the FTSE 100 up 1.5% today.

January sales

2016 has been a strange year for investors, one that began with a January meltdown on fears of a China crisis, which sent the index crashing to 5557. Brexit was another blow but then the index smashed through the 7000 barrier to within a whisker of its all-time high. Markets have since withstood Donald Trump and the Italian referendum, and have priced in a 0.25% interest rate hike by the US Federal Reserve, which is almost certainly coming next week.

So at today’s 6885 the index could easily bust through 7000 again and even menace its all-time high. That would be ample reward for investors who heeded our calls to be bold and buy stocks in January’s rout, when everybody else was selling and great companies were going cheap. 

Ho Ho Ho

That said, I won’t be rushing to buy the Santa rally. Sentiment is the main factor that drives the seasonal surge, along with lower trading volumes and technicalities such as fund managers repositioning their portfolios ahead of the year-end. I prefer to buy shares when markets are short of good cheer and shares are cheap, rather than when they’re floating on an expensive bubble of seasonal goodwill. 

The Santa rally is good clean fun but Lowcock’s numbers shows that sensible investors should stay in the market all year round. If you held the FTSE 100 each December since 1986 your investment would have grown 74% including dividends, but if you had stayed invested all the time you would have enjoyed a whopping 1037% return.

That’s an astonishing rate of return. It means that over the last 30 years, the FTSE 100 is a 10-bagger. Investing isn’t just for Christmas, but for every day of the year.

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Harvey Jones holds FTSE 100 tracker funds. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.