While kids are looking forward to what present Santa will leave under the tree on Christmas, investors are scrutinizing the markets for the seasonal rally. But this year, the Santa rally might have started earlier than usual, renewing investors’ hopes for a profitable investment year and giving more cautiously positioned investors a dose of FOMO (Fear Of Missing Out), writes eToro analyst for Romania, Bogdan Maioreanu..
The Santa rally effect is global and makes December the best month of the year, accounting for a fifth of returns. This year better fundamentals have met strong technicals. We had strong market gains in the past three weeks, broadened out from the tech sector to small caps and cyclicals and to overseas markets. Also a calm 3.3% US inflation report last week drove US 10-yr bond yields below 4.5%, oil prices to $80/barrel, and undermined the US dollar. Above all this we also have a strong statistical seasonality.
For the US S&P 500, December is usually the strongest month with an average return of 1.73%, and November is close behind (1.67%). Globally, December has an average return of 1.8%. Our analysis of 15 major markets shows the lowest December return from Spain’s IBEX (0.5% return) and France’s CAC (1.2%), whilst the best December is typically Hong Kong’s Hang Seng (3.0%) and UK’s FTSE 250 (2.7%). The Santa rally has usually been stronger outside the US, with S&P 500 December growth of 1.7% just below the world average.
The Bucharest Stock Exchange is somewhat different. Looking at the BET index since 1997, the December average was only 0.7% but was followed by a January with an average return of almost 5% making it the strongest month of the year. The second best month was August (+2.66%), followed by February (+1.54%).
The term Santa Rally was coined in 1972 and initially focused on the small number of days around the very end of the year and beginning of the next. It has since expanded, partly as investors have increasingly anticipated it. It is also associated with the positive ‘January effect’ of new investor allocations to start the year. The common denominator is investor repositioning ahead of a new year.
For investors 2023 looks to be profitable so far. Out of the major indexes Nikkei rose the most, over 30%, but the Bucharest Stock Exchange’s BET Index rose almost 26% from the beginning of the year, more than the large European stocks indexes like the German DAX (14.33%), the French CAC 40 (11.74%) or the European Stoxx600 index (7.28%). The UK FTSE100 made a very weak 0.7% return this year and the Chinese Indexes are showing a loss, Shanghai (-1.13%) and Hang Seng (-11.76%). S&P 500 is also up 18% from the beginning of the year. _
