The Weekly: Santa Rally or Christmas Turkey?


The FTSE-100 is up over 1% at the time of writing, the first working day of December.  Some would point out that this indicates that we are at the start of the so-called Santa Rally. However, in our opinion the strong start to December should be attributed to Donald Trump and Xi Jinping, and the cooling rhetoric between the two and their on-going (although temporally suspended) trade war.

Of course, there are no defined points for measuring a Santa Rally; some will include the first days of January, some just up to the New Year and some only until Christmas Eve, all with varying starting points as well. For the purposes of today we will look at how the stock market has performed from the first of December all the way to Christmas Eve. After all, Santa does arrive on the twenty-fourth of December, but only if you have been good over the last year!

Some may not believe in Santa and therefore his potential to inspire a rally, but looking at the performance of the FTSE-100 in December over the last ten years, there is some statistical merit in the legendary rally. What is less clear is the reasoning behind the phenomena.  Some used to say it was stockbrokers and fund managers ‘window dressing’ their holdings with stocks that have performed well. Some argue that it is people investing their Christmas bonus, whilst others believe that it is simply the more optimistic and bullish retail investor exerting their influence on the market while the institutional investors are away on their holidays.

Another theory is that the increased spending over the festive season gives a welcome boost to companies and their subsequent earnings. However, we don’t believe events like the recent Black Friday contribute to a Santa Rally. It is used by retailers to promote a shopping event imported from the United States, one whose popularity is waning somewhat. We would argue that with the UK high-streets struggling up and down the country, the best way to differentiate between online retailers and the high-street is to make shopping a better experience. Queueing up outside a retail store and trampling over your fellow shoppers while simultaneously grabbing the last flat screen TV does not resonate with an enjoyable day out shopping. It will be a welcome relief if and when the high-streets realise that competing on price with the online retailers is a war they can’t win.  

So, what has Santa delivered over the last ten years?  If you invested £100,000 in the FTSE-100 on 1st December in 2007 and remained invested until Christmas Eve of that year, and then repeated this process for the next nine years, then the £100,000 would now have grown to £125,405 (1). A return of over 25% on your original investment is quite remarkable given that you would remain uninvested for the other eleven months of the year. Of course, another adage that everyone is familiar with is that ‘time in the market is better than timing the market’ and this also proves correct that your original £100,000 investment would now be worth £172,340 if you had left the money in the market (FTSE-100) from 1st December 2007 to 1st December 2017 (1). However, while your return is superior, your money will have been invested for 120 months, so an average monthly return of 0.6%, which when compared to 10 months and an average of over 2.5% shows that December has been very rewarding in the stock market (1).

The most rewarding December in the last ten years was in 2010, when the FTSE 100 moved up by 6.5%. Overall, December was positive in eight out of the ten years between 2007 and 2017. While the Santa Rally might be a statistical phenomenon and certainly shows that over a prolonged period of time there is some truth to it, it does not mean investors should rush out and invest in the stock market.

Truth be told, nobody really knows the reasoning behind a Santa Rally, so investors should not necessarily expect a Santa Rally this December.  With Theresa May’s key Brexit vote in the Commons on 11th December, it could well be a very bumpy ride indeed and anyway, not every adage turns out to be correct every year. As everyone knows, past performance is not indicative of future performance. It could well turn out that instead of a Santa Rally, investors wake up to a lump of coal in the highly likely event that Theresa May does not get her Brexit deal through. The consequences should her deal fail, could be another referendum or election. We would prefer the lump of coal.  But then again it could turn to gold if she secures a second deal with an option for the UK to unilaterally remove the backstop.

Theresa May has to be commended in calling out Jeremy Corbyn for a televised TV debate on Brexit. There is no doubt that she is coming from a position of weakness, while on the other hand, Jeremy Corbyn is coming from a position of relative strength, where all he must do is oppose whatever deal Theresa May puts forward. In any television debate, he will have to elaborate on what he would do differently to Theresa May. Of course, it is naive to think that Labour would have achieved more concessions from the EU than the Tories. For the EU, it makes no difference who they deal with and we have to assume that the deal we have is the best on offer.

So, as far as any TV debate goes, we see that Theresa May has it all to gain, while Jeremy Corbyn has it all to lose. However, perhaps the most depressing thing about the proposed television debate is the fact that both sides can’t even initially agree on the time or format.  Jeremy Corbyn doesn’t want the debates to clash with the ITV program ‘I’m a Celebrity get me out of here’. Digging deeper on this reveals that a post ‘Celebrity’ audience on ITV will be younger and therefore more pro-Corbyn than a post ‘Strictly’ audience on the BBC. Either way, it is depressing that our country’s future is being worked around reality TV programme schedules!

So, whilst history does show us that Santa and his Rally may indeed exist, the continued geopolitical uncertainty suggests that we could be dealing with more of a Christmas Turkey than soaring markets.  However, the optimistic reader will point out that even turkeys can sometimes fly! 

Source: FE Analytics 2018 (1)


US equities rally as rate rise expectations ease

US stocks rose sharply as the Federal Reserve chair hinted that interest rate rises over the coming year may not be as quick or as many as current market expectations suggested. The S&P 500 index enjoyed its best weekly return in more than seven years, closing +4.9% higher (1).

US equities saw a stark reversal on recent form. Fed chair Jerome Powell’s words appeared to give investors confidence that the central bank was conscious of slowing growth and apparent headwinds rather than stubbornly stuck on a single-track road to 4% rates. Thursday’s minutes of the November policy meeting suggest the committee remains on course for December’s final 25 basis point rise of the year, but also suggested some Fed members expressed uncertainty over the timing of additional increases. The US 10-year treasury yield dipped 4bp during the week to close on Friday at 3.02% (1). The US Dollar meanwhile strengthened against both Sterling and the Euro, climbing +0.4% and 0.2% respectively (1).

Brexit uncertainty continues to act as a headwind for many UK stocks. The Bank of England’s Financial Stability Report painted two very polarised outlooks dependent upon the UK maintaining close ties with Europe compared with a no-deal Brexit. The FTSE 100 index finished the week just +0.4% higher, lagging most other established developed markets (1).

China's official manufacturing PMI (Purchasing Managers' Index), a measure of business activity, dropped to a two-year low at 50 last week. A reading of 50 separates a growing industry from a contracting one. The reading adds to concerns over waning global growth. 

Elsewhere, European markets achieved modest gains; the German DAX 30 climbing +0.6% and the French CAC 40 up +1.2% for the week (1). Japan’s Nikkei 225 index enjoyed a strong week with a gain of +3.3% (1).

The US oil benchmark West Texas Intermediate temporarily slipped below $50 per barrel this week despite the prospect of a notable production cut from OPEC and Russia (2). The price was able to recoup some lost ground in late-week trading to close at $50.69 (2).  The primarily European benchmark Brent crude oil ended Friday -0.2% at $58.71 (2). The price of oil will be a focus, along with trade, at this weekend's G20 summit. 

Datastream 2018 (1)

Forex Factory 2018 (2)


Week Ahead

Following on from this morning’s strong manufacturing production data, the Services sector is also forecast to show improved output when its PMI is released on Wednesday. Meanwhile tomorrow, the British Retail Consortium releases updated sales data for November. In the US, the Institute for Supply Management releases its own production indices covering last month whilst on Friday, the Bureau of Labour Statistics releases its monthly labour market report. Unemployment is forecast to have held steady at +3.7% with 200,000 new jobs expected to have been created (1). It’s a busy week for the Eurozone with finalised PMI’s, industrial production, retail sales and a revised Q3’18 GDP number all due before the close of play on Friday. Chinese media company Caixin releases its version of November’s PMI’s this week covering the smaller, private entities in the country although there is little activity in Japan on this occasion. The gathering of OPEC oil minister in Vienna on Thursday will also receive plenty of attention as they seek to address the considerable slump in the oil price over the last few months. Russia and Saudi Arabia are widely expected to cut with President Putin announcing over the weekend that the two nations have agreed to ramp up efforts to stabilise prices to counter the recent fall.

Source: Forex Factory 2018 (1)