Will December bring a ‘Santa Rally’ or a stock market crash?

Jon Smith questions whether a stock market crash or rally are more likely to close out the year, along with the actions he’s taking.

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With mince pies already being stocked in various supermarkets, people clearly have one eye on the December holiday season. As an investor, the final month of the year also warrants attention with people split between looking for either a stock market crash or a rally. So which one is it to be?

The case for a rally

After hiking the base rate in August to 5.25%, the Bank of England committee has left the rate unchanged. The next (and final) meeting of the year will be on 14 December. In the period leading up to and after that date, the stock market could rally.

This would likely be the case if the committee left rates on hold again and also signalled that interest rate cuts are on the horizon for 2024. This would be taken as a positive by investors, with a lower base rate seen as a stimulant for economic growth.

Another factor in play is what people refer to as the ‘Santa Rally’. A more investor-friendly name for it is seasonality, referring to the historical rally in the stock market over the festive period.

Depending on which study we read, the hard evidence for this actually happening on a consistent basis is dubious. Yet it’s true that various factors surrounding the year-end do seem to support stock prices in December.

Let’s talk about a crash

The main reason why I believe a crash could happen is a swift fall in investor confidence. This could be driven by the outlook for the UK economy in 2024.

Inflation has been hovering around the same level for the past three months. If the further releases before year-end don’t show it falling, I think people could start to get concerned. Higher inflation along with no economic growth is a really bad mix for an economy. It could lead to a recession.

If this gets more negative media coverage, or there’s the publication of some doomsday analyst report, it could provide a catalyst for a market crash.

It’s also worth considering the impact of geopolitics. Even though the wars in Ukraine and Gaza haven’t had a material impact on the UK stock market yet, this isn’t to say an escalation couldn’t do some damage. This would be especially true if it involved some form of direct UK intervention or action.

My game plan

As we head to the end of the year, my position regarding investing hasn’t changed. My current holdings should do well if we do get a Santa rally. Yet if we get a crash, I’ll put my spare cash to use by picking up some stocks that I feel are oversold and undervalued.

In that way, my key priority between now and the end of the year is building a watchlist of shares I can execute if the opportunity presents itself.

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.

Jon Smith 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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