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Why I’d consider buying the FTSE 100 ahead of this year’s Santa rally

I know, it’s a bit early to be getting excited about Christmas, but in this case it can really pay to be prepared.

Santa calls

You may be aware of the phenomenon known as the Santa rally, a statistically proven phenomenon that shows that markets put on their best festive face in the final few months of the year. New research from wealth manager Brewin Dolphin suggests that not only is it real, but it tends to kick in earlier than you think, in grey and dreary November.

The Santa rally is reputedly fuelled by Christmas cheer, tax planning and annual bonuses, but whatever the reason, the statistics show it happens. Brewin Dolphin crunched the data and found the final two months of the year have outperformed the previous 10 months 73.5% of the time – in 25 years out of 34.

Ho ho ho!

On average, the FTSE 100 gained 1.43% in the final two months, against just 0.41% in the first 10 months. An almost identical pattern can be seen on the FTSE All-Share, where November and December beat the 10-month average 27 times out of 38, or 71% of the time. Oh I wish it could be Christmas every day.

The only notable exceptions were some bumpy years in the 1980s and in 2007, as the financial crisis set in, says senior investment manager Alisdair Ronald. “You could make the case that the Santa rally is almost a self-fulfilling prophecy. Investors anticipate it and try to get in ahead of everyone else.”

Yule be rich

Historically, the best couple of weeks tend to begin after December 10, although markets stir before then as investors gear up for the annual phenomenon.

This means you could theoretically stick to investing in November and December, and shun the rest of the year, but there are reasons why that’s a bit daft. First, you will rack up trading charges buying then selling your entire portfolio just a couple of months apart. Also, you will sacrifice all those juicy dividends you get in the other 10 months of the year, and are a major contribution to your future wealth, especially if you reinvest them for growth.

Jingle all the way

The big question is whether the Santa rally is coming to town this year. It would certainly be very welcome after a tough first 10 months of 2018, culminating in that October sell-off. The FTSE 100 started the year at 7,687, but at time of writing has dipped to just 7,016, a drop of 8.7% year-to-date.

However, that does leave it trading at a price/earnings ratio of 15.98, close to fair value and just half the toppy-looking valuation on the US S&P 500, currently 30.67. The FTSE 100 also offers a whopping dividend yield of 4.25%, which is incredibly high with the average easy access savings account paying just 0.5%.

It’s Christmas!

You have to set that against a number of political and macroeconomic headwinds, including the US-China trade war, the EU’s double-headed stand-off with Italy and Brexit Britain, and the ever-present danger of a Chinese bubble. Still, investors tend to shrug off worries like these in December. Christmas is coming, after all.

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harveyj 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.