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The Santa rally is real! Christmas is coming and history suggests the FTSE 100 could soar

If you’re reading this, you’ve probably reached an age where you no longer believe in Father Christmas. Don’t be too cynical though, because there is one seasonal story you can put your faith in. It’s called the Santa rally.

Christmas is coming

This is a festive tradition that says stock markets start to fly as the year draws to a close. History suggests it’s real, with a rally happening in 25 of the past 30 years, according to new research from Fidelity International.

Theories abound as to why it occurs. Many believe Wall Street is the driver, as bankers invest their annual bonuses, risk-averse institutional investors clear off early, and the general Holiday spirit sees people pumping money into the market.

Fidelity International’s associate director for personal investing, Ed Monk, says stock market superstitions should be viewed with caution, but the annual miracle at Christmas is difficult to debunk. “Trading tends to be thinner around the holidays so movements in the headline levels of stock market indices are amplified,” says Monk.

The Santa rally may also be a self-fulfilling prophecy. People expect a rally, so people get a rally, unless something major prevents it. You could prepare for it by loading up on top FTSE 250 stocks.

Winter warmer

Last December was a rare exception, as the FTSE 100 suffered one of its worst winter performances due to anxiety over the US-China trade war and Brexit. On Christmas Eve, the Dow Jones fell an unprecedented 2.9%, having never fallen less by more than 1% on that day in 90 years. It rallied by New Year though.

This year largely depends on two factors. The first is the outcome of US-China trade talks. If we get some good news on that front, a phase-one trade deal, then global stock markets may embark on a magical sleigh ride.

That’s far from guaranteed. President Donald Trump’s move to sign into law the pro-activist Hong Kong bill suggests he’s still playing hardball. I believe he will want to time any signing of the bill to deliver maximum benefit during next year’s election campaign. On that score, we might have to wait until the spring, or the summer. We could still have a Santa rally though, provided there isn’t a complete breakdown in talks.

Electoral maths

As far as the UK goes, everything depends on the general election on 12 December. If Boris Johnson’s Conservatives win a clear majority, then Santa can buckle up his seat belt. That would signal an end to Brexit confusion, and may give him more room to be flexible in crucial trade talks with the EU, free of the DUP, and his own party’s Brexiteer ultras.

Or would it? Johnson’s pledge he will not extend the Brexit transition period beyond 2020 could revive fears of a hard or no-deal Brexit, which markets would hate.

A hung parliament won’t be good either, unless markets believe this is more likely to trigger a second referendum, and put a stop to Brexit altogether.

An administration led by Labour’s Jeremy Corbyn is likely to kill the Christmas spirit altogether, given his aggressive anti-business stance. The crash could be a buying opportunity for stocks like these.

The Santa rally hangs in the balance. Although in one key respect it doesn’t really matter. Investing is a long-term game, and Christmas comes but once a year.

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Harvey Jones 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.