Why the FTSE 100 may (or may not) rally in December

The markets have had a rotten couple of months. Could they end the year on a high?

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As we approach December, I think it’s fair to say that the vast majority of investors are looking forward to seeing the back of 2018. 

Despite hitting all-time highs back in May, the FTSE 100 index is now 8% lower than it was at the start of the year, thanks to a combination of trade war posturing, concerns over rising interest rates and, yes, the seemingly perpetual elephant in the room that is Brexit, weighing on Mr Market’s mind.

Of course, there’s still time for sentiment to change. Indeed, if history is anything to go by, things could pick up markedly in December. 

What is the Santa Rally?

The term ‘Santa Rally’ is used by investors to describe the often-seen rise in the price of equities as we approach the end of the year. 

There’s no overwhelmingly obvious reason as to why this happens but — as Stephen Eckett details in Harriman’s Stock Market Almanac — explanations have varied from “fund managers window dressing their portfolios, positive sentiment in the market caused by the festive season which is accentuated by low trading volumes, anticipation of the January Effect and tax reasons” (the January Effect is the tendency for stocks to do rather well in the first month of the year).   

So, it’s pretty much nailed on?

Sadly, no. To be clear, there’s no guarantee that the FTSE 100 — and shares in general — will rise before the end of the year. As financial advisers and fund managers never tire of reminding their clients, past performance is no guide to the future.

That said, the Santa Rally is a phenomenon backed by statistics. According to Eckett, the FTSE 100 index has climbed in 78% of the Decembers since 1984 and registered an average monthly return of 2%. Based on this, you could say that we’re more likely to see share prices rise than not.

If we are to experience a rally, it probably won’t begin in an orderly fashion from next Monday (3 December — the first trading day of the month). Evidence suggests that things only really get going after the ninth trading day. In 2018, this will be 13 December. 

You probably don’t need reminding that, before then, we have a rather important vote in parliament  — the result of which will surely influence the direction of markets well beyond next month. 

The acceptance of Theresa May’s withdrawal agreement will likely be welcomed by investors since it brings some much-needed certainty to the process. Should parliament vote against the deal, however, thereby forcing the Government to re-negotiate, consider a second referendum, call yet another general election, or leave with no agreement in place, it seems fair to presume that the absence of a Santa Rally will be the last thing on our minds. 

Stay Foolish

Buying shares purely on the belief that prices will rise in the run-up to the holidays is about as far as you can get from the Foolish philosophy of building a diversified portfolio of quality stocks and holding them for the long-term. The former is akin to gambling, not investing.

Taking into account the momentous political event in less than a fortnight’s time, I think it’s far more important for all market participants to check that their holdings are aligned with their risk tolerance and investment horizon rather than speculate on whether Santa may arrive early, if at all.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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