FTSE 100 Santa Rally: Is it fact or fiction?

The Santa Claus Rally is said to drive markets like the FTSE 100 higher in December. Looking at the data suggests there is, in fact, some truth to this, but what does that mean for investors?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Baubles On Snow With Snowy Christmas Tree

Image source: Getty Images

‘Tis the season of goodwill. But, does the magic of the Christmas season extend all the way to the FTSE 100? The UK’s main stock market index is up 4.2% already, and we are not even halfway through December. That might cause investors to believe that the so-called Santa Claus Rally is more fact than fiction. However, the general cheer about coronavirus vaccines being rolled out in the UK and the pandemic looking to be coming to an end is probably a better explanation of why the FTSE 100 is performing strongly.

Looking at the average monthly returns for the FTSE 100 in December, and the other 11 months, going all the way back to 1996 should provide a clearer picture. After looking at the data, there might be some truth around the idea of a Santa Rally lifting the FTSE 100 in December.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

Has the FTSE 100 been naughty or nice?

The Santa Claus Rally was identified in 1972, by a stock market analyst and author called Yale Hirsch. Specifically, it refers to a tendency of stock markets to rise in the last week or so in December. Market commentators have, however, extended the original observation to December as a whole. So, how does the FTSE 100 tend to perform in December? 

Well, the average monthly return on the FTSE 100 index in December is 2.02%. That is higher than any other month’s average return, save one, going all the way back to 1996. The average return in April was, in fact, the highest at 2.34%. However, my efforts to get the Easter Bunny Hop recognised have failed. That’s probably because Easter sometimes falls in March.

Chart showing the average monthly calendar returns of the FTSE 100 since 1996

Source: Yahoo Finance and author’s own calculations

So let’s get back to the FTSE 100 and December. On average the market rises more in December than any month other than April. December also has the lowest standard deviation of returns at 2.98%, meaning they are less spread around the average compared to other months.

That does not mean that losses do not occur in December. The worst December performance for the FTSE 100 was -5.49%.  In comparison, the worst returns in April and November were -3.25% and -4.6% respectively.

What does this mean for investors?

It’s an interesting observation that the FTSE 100 does tend to perform better in December compared to other months, except for April. The Santa Rally might indeed be real rather than fiction. Will this change how I invest? No, it won’t.

Although there are numerous theories around why markets tend to do better in December, none of them has proved conclusive. Returns are not always positive in December, and there is no reliable way to predict if a Santa Rally will occur. I can’t tell which years will see the Easter Bunny Hop either, unfortunately.

In an earlier article, I demonstrated that time in the market beats trying to time the market over the long-term. Trying to catch a Santa Rally or even an Easter Bunny Hop, is trying to time the market. Over 25 years or so I might get that average 2.02% or even 2.34% return. However, The FTSE 100 has returned 8.33% per year on average over the last 25 years, including dividend reinvestment. I would rather be in the market for the long term, rather than trying to time it.

More on Investing Articles

Female florist with Down's syndrome working in small business
Investing Articles

2 promising penny stocks to buy on the dip

As stock markets continue to correct, I am hunting for oversold penny stocks that I think could help turbocharge my…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

I wouldn’t buy Bitcoin today. FTSE value stocks look much better value to me

Now looks like a promising time to buy UK value stocks, while Bitcoin still looks far too risky for me.

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

The Rolls-Royce share price is below 85p. Here’s what I’m doing!

The Rolls-Royce share price has suffered this year. Trading for below 85p, this Fool decides whether this is an opportunity…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

4 dividend stocks to buy as inflation soars!

I'm hunting for the best dividend stock to invest in as global inflation soars. Here are several high-dividend-yield shares that…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

UK shares to buy now: 3 big fallers I’d snap up

Our writer thinks this trio of strong business performers could be attractive UK shares to buy now for his portfolio.

Read more »

Lady researching stocks
Investing Articles

Could a falling stock market help me get rich?

When the stock market falls, what does it mean for our writer's portfolio? Here's why it could be an opportunity.

Read more »

Hand holding pound notes
Investing Articles

Should I buy these two 12%-yielding dividend shares for my Stocks and Shares ISA?

Do these double-digit dividend yielders offer our author the right balance of risk and reward for his Stocks and Shares…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 reasons to buy Lloyds shares at 43p

Our writer outlines three factors that make him bullish on Lloyds shares, as well as one noteworthy risk facing the…

Read more »