Are we heading for a Santa Rally this year?

The so called Santa Rally is a real phenomenon – there’s evidence to suggest stocks rise around the time leading into Christmas. However, Dr Shane Oliver highlights a few headwinds that need to be overcome for stocks to follow the same trend this year.

You don’t have to believe in Christmas miracles to be hoping for share markets to finish the year with strong returns.

The so called Santa Rally is a real phenomenon – indeed, there’s evidence to suggest stocks rise around this time of the year leading into Christmas and between Christmas and the new year.

But if Jolly Old St Nicholas is to deliver this year like he has in previous years, there are some headwinds he and his trusty reindeers will likely encounter.

Much has been written about the challenges retailers are having with the arrival in Australia of ecommerce giant, Amazon – just in time for Christmas. The price discovery Amazon is likely to provide consumers with is expected to be felt by retailers for years to come.

High household debt is the other factor that has the possibility to dampen the Christmas cheer; while Australian homeowners will likely feel “asset rich” given the movement of house prices and share markets, wage growth remains stagnant. Also, movements by banks of customers from interest only to principal and interest loans could increase repayments for some households and lead to the purse strings being pulled even tighter.

But whatever happens in the New Year and beyond, history tells us that a little bit of Christmas cheer can go a long way when it comes to share market returns. Here’s what the underlying seasonal pattern looks like this in terms of share price indexes.

Source: Thomson Reuters, AMP Capital

Basically, the Santa Rally is part of a well-known seasonal pattern in share markets that sees strength building from November onwards.

The rationale for the effect is attributable to a few things – the beginning of the Santa Rally coincides with the ending of US tax loss selling, where US investors sell losing shares into September to reduce their capital gains tax bill only to buy back into the market toward year end.

Also, at this time of the year, there’s a winding down of new equity raisings which could result in less dispersion of interest by investors.

Then there’s the New Year cheer philosophy and the reinvestment of bonuses all at a time of relatively thin volumes. This tends to continue into mid-year before weakness from around May to October. This leads to another old investment adage “sell in May and go away”.

While January used to be a much stronger month for markets, in recent years it’s tended to move into December, as investors have come to anticipate seasonal strength around this time of year.

The Santa Rally itself normally gets underway from around mid-December and is at its strongest in between Christmas and New Year when the absence of capital raisings and a feel good factor seems to combine with low volumes to help push shares higher.

Here it is again in terms of average monthly percentage changes.

Source: Thomson Reuters, AMP Capital

Of course’ it’s always a case of “all other things being equal” and major fundamental development can of course swamp seasonal Santa Claus influences, but that said it’s been a fairly reliable pattern over many years.


Source: Written by Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital, December 1, 2017