Should You Buy The FTSE 100 Ahead Of A Santa Rally?

Towards the end of the year the market always seems to be in a good mood, and this trend — which has been branded the Santa Rally — seems to be one of the market’s most predictable traits. Indeed, there’s a surprising amount of evidence which supports the prediction that stocks will do well towards the end of the year. According to Hargreaves Lansdown, December has been the best month for stocks for the past three decades. The UK indexes, including the FTSE 100 have all posted a positive performance almost nine times in ten. Since 1984, the FTSE All-Share index has only fallen five times since December 1984.

However, while there’s plenty of evidence to prove that the Santa Rally occurs almost every year, it’s not known what drives the rally. Some analysts have speculated that investors are overcome with Christmas spirit, and this good feeling helps push the market higher. Although, while Christmas cheer could be one driver behind the rally, it’s likely that much more tangible factors are at work here. For example, over the Christmas period, trading volumes fall as the City goes home for the holidays and thin trading could exacerbate market movements. But the real reason behind the Santa Rally could be quite simple: people expect it to happen. If investors are expecting a Santa Rally every year, and invest accordingly, this additional buying pressure will affect the market. Buying by investors ahead of a possible Santa Rally, coupled with thin trading volumes, could easily explain the Santa Rally phenomenon. 

Will the FTSE 100 see the effects of a Santa Rally this year? Well, it would be silly to bet against a rally with so much evidence supporting the phenomenon but there are some factors that could dampen investors’ spirits this year. The European Central Bank has already poured cold water on investor optimism by not increasing its quantity easing program to the level expected by analysts and it’s widely expected that the US Federal Reserve will increase US interest rates later this month. Many analysts believe that an interest rate hike could send markets lurching lower. So it’s difficult to tell what the future holds for the FTSE 100, historic trends show that a Santa Rally is highly likely, although there are plenty of factors that could weigh on investor sentiment going forward. 

In reality, it’s difficult to try and predict what the future holds for the FTSE 100. Even some of the world’s most prominent investors fail to identify correctly market trends and more often than not, trying to time market movements can end up costing you a lot of money. That’s why the most successful investors focus on the long-term performance of equities. They build a portfolio of stocks that have reliable long-term outlooks, illustrious histories, dependable dividends and hold for the long-term, buying and forgetting, watching their wealth steadily accumulate with minimal effort.  

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Rupert Hargreaves has no position in any shares mentioned. 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.