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By: Tim Bennett
06.12.2019
06.12.2019
Do stock markets usually end the year on a high note and what should investors do about it? Tim Bennett investigates in this short video.
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What is a “Santa rally”?
Some analysts believe that the stock market perks up as we head towards the end of the year. So here I look at the evidence and ask what investors should do in response.
Background
Stock market trends are all the rage amongst some observers. We have “sell in May and go away” and now the “Santa rally”. Most of the evidence for this is based on the behaviour of the S&P 500, arguably the most important index in the world. So, what is the case for a mini bull run before the end of the year?
The bull case
Fans of this theory mostly focus on the last two weeks of December and therefore of the whole year. Since the late 1960’s they claim that stock market movements have mostly been positive during this period.
Why?
Your view on whether there is indeed a pattern here will depend on what you think is behind this late rally. Several theories have been put forward as summarised here;
Enter Tom Lee
However, one analyst recently went out on something of a limb by seeing scope for a much longer and stronger rally this year. Tom Lee, Head of Research at Fundstrat, makes the case for a surge that starts much earlier and is more sustained.
Once again, his conclusions are based on a look back at the S&P 500 but this time over the past 20 years.
Reasons to be cautious
The problem with all this bullishness is the usual one of cause and effect. Stock markets have risen over the last decade on a tide of central bank largesse but if you go back a bit further you can unearth some pretty big falls, even after a supposed Santa rally.
Other bearish factors
Added to this is the sense, amongst quite a few investors, that one of the longest and deepest bull markets in history may now have run its course.
Does this matter to investors?
For long-term investors, it matters little whether you buy the Santa rally argument or not. The reason is that, either way, it shouldn’t really alter your strategy. Indeed, it is best popped into the basket of interesting media-driven theories that I call “noise”. Personally, interesting though I find the theory, there is not much in it that is of any practical use to anyone other than a short-term trader.
To find out more
Feel free to email on [email protected] or contact an Adviser to discuss any of the issues raised here in more detail.
