Early December last year (along with many years prior) we wrote about the Santa Rally phenomenon, which holds that equities tend to post gains in December. This comes via a helpful recipe of lower holiday season trading volumes, window-dressing by portfolio managers (hold the winners to impress clients) as well as it now having become something of a self-fulfilling prophecy. This year, we believe it may be worth getting on board early given the rally that started at the end of September. We have thus expanded our timeframe to include November, allowing us to publish ahead of the crowd and ensure clients can capitalise on any further market gains this month.
The broader period is just as interesting as December alone in terms of equity index gains with the UK’s FTSE100 showing a winning tally of 17 out of the last 20 years (85%) which only the German DAX 30 can match. The S&P 500 and Dow Jones at 75% are still very respectable and highlight how the probability of equity price gains is strong, and statistics very much in investors’ favor. Even more impressive is the similarity in average Nov-Dec gains over the 1995-2014 period, with all six indices delivering three percent or better. That’s at least 18% annualised...and that can’t be ignored.
Loose Monetary Policy May be Coming to an End
Now there is no guarantee that history will repeat itself, and we would always suggest looking at the best and worst years for an idea of the extremes that have been registered (+10, -4% for the FTSE). It would also be prudent to examine some charts to see for yourself the degree of volatility one could experience during these two months. We do, however, point out the potential for the FTSE to play catch-up with global peers, being the most below water year-to-date. Even just a few percent would add another year to its winning tally. Could the battered mining sector lead the way as production gluts reverse and depressed commodity prices recover?
Markets continue to debate whether the US will raise interest rates via an early Christmas present, signaling the beginning of the end for loose monetary policy. However, the European Central Bank is hinting strongly at boosting its flailing QE programme in December. The Bank of Japan has potential to follow suit to shore up its struggling economy, and market mover China may have to step in to ensure growth holds up as it transitions from an export to consumer-led economy. Other central banks like Sweden have ramped up QE and could cut rates sub-zero. While the Fed is itching to hike, and markets are worried about both the first hike and the uncertainty in the run-up, the easy money party is nowhere near over. Rates will remain near rock bottom stateside for a good while longer and if peers add to their QE programmes the net effect could in fact result in even easier policy on a global scale. So if you want a trade that has stats on your side, you’d do well to start here.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer