The FTSE 100 index – which measures the share performance of the biggest companies in the UK – surged this morning by over 0.46% by midday. But this shouldn’t surprise the most seasoned investors – Christmas is often the most wonderful time of the year for investments.
Share performance often improves in December, a trend affectionately known as the ‘Santa rally’. The market is once again showing signs of an upswing, with the FTSE 100 rising almost 0.7% early in the morning trades and by 0.46% by midday.
Which? takes a look at this stock-market phenomenon, and explores whether you should be pinning your hopes on a Christmas boost for your investments.
What is the Santa rally?
A rally is a rapid increase in the general price level of the stock market or the price of a particular stock. While rallies can happen at anytime, traditionally, a rally often occurs towards the end of the year.
This is referred to as the ‘Santa rally,’ as it happens to coincide with the festive period.
There is a lot of speculation as to exactly when the rally takes place. Some argue that it relates to the entire month of December, while others believe it’s only the last two weeks of the month.
Some also claim that the Santa rally lasts for the five trading days of any given year (which covers the period between Christmas and the New Year.)
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Is the Santa rally real?
While the Santa rally is widely considered a myth, research from Schroders suggests that it could be real – and that there’s a strong possibility it will happen again this year.
Since 1987, the FTSE 100 – an index of the UK’s largest companies listed on the London Stock Exchange – has risen by an average of 2.4% in December, the highest average gain of any month in the year.
According to Schroders, there is an 83.3% chance that the Santa rally could strike again this year.
The next best performing month is October, where there is a 74.2% chance of the stock market rising.
June came out as the worst performing month, with the stock market falling by an average of 1%.
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Where does the Santa rally happen?
In true festive fashion, the Santa rally comes to stock markets across the globe.
Similarly to the UK, December is the best performing month for stock market prices worldwide, while June is the weakest.
Taking an average of the FTSE 100 (UK), S&P 500 (US), MSCI World (Global) and Eurostoxx 50 indices (Eurozone), a 79.2% chance of a rally in December was measured.
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Can you really predict the stock market?
It is nearly impossible to predict how the market will behave, especially over a short time period.
Past performance is not indicative of future results, so making investment decisions based solely on theories such as the Santa rally could lead to a number of investment risks.
According to Shroders, using a long-term strategy for investing could provide better returns overall for investors.
Take the FTSE 100, for example. Since December 31st 1986, the index has grown by 4.9%.
This means that if you invested £1,000 in the FTSE 100 in 1986 and left the money alone for 31 years, your investment would now be worth £4,463.
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