As we get ready to say goodbye to a tumultuous 2020, the FTSE 100 has a spring in its step. Sure, it’s been up and down over the last few days, but the general direction is most certainly up. The UK stock market’s top tier closed at 6,368 yesterday — 14% higher than where it stood just one month ago.
Could we get past 7,000 next month? History suggests it’s not out of the question.
FTSE 100: Santa rally ahead?
December has earned itself a reputation for being the strongest month of the year for UK share prices. In fact, research by Stephen Eckett (and published in Harriman’s Stock Market Almanac) has shown that the FTSE 100 index has fallen just three times in the month since 1995. It even has a habit of outperforming the US S&P500!
Interestingly, there doesn’t appear to be one clear reason for this. What we do know however, is that the final two weeks of December tend to be particularly strong.
Known as the ‘Santa Rally’, here’s why I think this may happen again in 2020.
Why 7,000 might be broken
It seems logical that further good news on coronavirus vaccines could push the FTSE 100 higher. Having received positive results from Pfizer, Moderna and AstraZeneca in the past few weeks, it’s now the job of the Medicines and Healthcare products Regulatory Agency (MHRA) to give its approval. Expect fireworks if we get this in December.
The psychological effect of emerging from lockdown restrictions shouldn’t be underestimated either. While many UK businesses will continue to struggle, the mere belief that things are improving could send share prices higher on its own. Remember — the market is more interested in what will happen next, not what’s happening now.
Despite recent gains, UK shares also remain cheap relative to elsewhere in the world. News of a Brexit trade deal would undoubtedly go some way to addressing this. Further monetary stimulus in the US would be another boost.
On the other hand…
Of course, there’s also no shortage of reasons for why the FTSE 100 will fail to break through the 7,000 barrier.
Aside from the possibility of unexpected hurdles for the aforementioned vaccines, there are fears that coronavirus infection rates could rise as a result of families being allowed to meet over Christmas. This ‘two steps forward, one step back’ state of affairs could slow momentum.
With chancellor Rishi Sunak warning that the full economic impact of the pandemic has only just begun, many in the UK may also be inclined to keep their purse strings tightened until 2021. That’s problematic when you consider how dependent most of the UK’s listed retailers — and their share prices — are on the festive period for sales.
In addition to all this, many traders may begin to bank whatever profits they’ve managed to make in 2020.
Don’t time the market
It is, of course, impossible to say for sure where the FTSE 100 will be at the end of next month. As such, my investment strategy remains the same. Like top UK fund manager Terry Smith, I’m looking for top-quality companies trading on reasonable valuations that I can hold for years.
After a rollercoaster 2020, a soaring FTSE 100 would be a nice Christmas present for UK investors. Just don’t bank on it.
Paul Summers 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.