Will we see a Santa Rally this year?

For investors, the Santa Rally has proved to be a ‘strange but true’ phenomenon over a lengthy period. So will we see one this year, particularly as 2017 has already seen impressive returns across most stock markets?

Recent research by Schroders confirms that the FTSE 100 does indeed usually rally over the Christmas period. Looking at the past 33 years, it shows that December was nearly always the best performing month, rising 27 years out of 33 since 1984. Over the past 30 years, the market rose on average by 2.4% each December - the highest the average gain in any month of the year.

This phenomenon happens across the world as well. Schroders analysed other major stock markets, including the S&P 500, MSCI World and Eurostoxx 50 indices, and found they rose 79% of the time in December.

Despite this, there is obviously no guarantee that the Santa rally will happen this year, particularly given that many markets are already trading at or near record highs and possibly due a sell-off.

In practice, it is impossible to predict when the best days or months might fall, so investors would do better to adopt a long-term approach. By doing so, you smooth out the volatility and give your investments more time to work properly.

To demonstrate this, figures from Architas show that if you had only bought FTSE 100 shares in the Santa Rally since 1986, your investment would have grown by 79%, including dividends. However, if you had stayed invested all the time, you would have amassed a return of 1,387% over that period, before fees.

So the Santa Rally is a seasonal trend, but the reasons behind it probably have more to do with human behaviour – a feelgood factor based on goodwill and festive cheer - rather than anything more substantial. Others more prosaically put it down to fund managers repositioning their portfolios before the year end.

Either way, investors should probably ignore it (the Santa Rally not Christmas!) - particularly as markets have already risen significantly this year - and you should instead continue to focus on your long-term financial objectives. It’s probably the best way to avoid a New Year investment hangover!

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