No Santa rally but we still have the January Effect

If you don’t know what the Santa Rally is and are conjuring up images of a Father Christmas costumed car race, or St Nick staging a brief recovery from a long illness, it is, in fact, a reference to the tendency for stock markets to rise around the Christmas season.

Plenty of statistics back this up, but one of the most straightforward is that an analysis of the S&P 500 from 1950 to the present shows the index delivered a positive return 74% of the time in December- more often than any other month of the year.

This phenomenon isn’t restricted to the US but is common to countries around the globe that celebrate Christmas, including the UK. Quite why the phenomenon occurs is unclear, and in truth there are probably several specific factors behind each individual rally. However, a few of the major theories on why markets rally in December include:

• Seasonal goodwill among investors, who are more willing to buy around Christmas. 
• Markets rising on lower volumes while investors are away for the holiday period.
• Fund managers rebalancing their portfolios before the end of the year.
• Retail investors putting Christmas bonuses or cash gifts to work.
• Self-fulfilling prophecy. Traders and retail investors have heard of the Santa rally and so buy into it in the hope of making a quick return.

Does this mean a smart investor should buy before Christmas and sell after? Not really. The most tried and tested investment strategy is to buy stocks and hold them for the long-term. It’s worth nothing that in the past 75 years the S&P showed a positive monthly return 62% of the time and even the very worst performing months of February, June and September ended in positive territory on 52% of occasions. It therefore makes sense to be in the market every month of the year and not just December. 

As it happened there was no Santa rally this time around, with 2024 joining the ranks of the 26% of Decembers since 1950 that saw a negative return for the S&P, with a sizeable 3% decline in the month. That’s an unusually large fall but a bit of rebalancing is hardly a shock after an unprecedented 6% rise in November off the back of Trump’s victory. 2024 was an incredible year for US stock markets, with the S&P 500 up 24% and Nasdaq up 32%, and this was the second year in a row of gains in excess of 20%. 

It is now time to brace for the January Effect. This refers to another positive market phenomena with stock prices being driven up by factors such as new budgets coming into effect and general optimism for the future. The S&P 500 Year to Date (i.e. the last week) is already up 2%, the All-World Index 1.7% and even the FTSE All Share is up 0.7%. So far so good, and here’s looking forward to a healthy 2025 for global markets.