Will there be a ‘Santa’ Share Market Rally in 2018?

Originally published by: Dominic Beattie 

The Australian share market has had a shocking couple of months, October was down 8% and at the time of writing, has yet to recover. Among other issues, global shares have also tanked and global trade tensions have remained present in the background. But will the traditional ‘Santa’ rally show itself in the final quarter of the calendar year?

What is a ‘Santa’ Rally?

The ‘Santa’ rally refers to the historical trend of share prices rising in the month of December, generally around the Christmas and New Year period.

The term was first coined in 1968 by Yale Hirsch, the editor-in-chief of the Stock Trader’s Almanac. He was referring to the performance of the US S&P 500 in the last five trading days of the year and the first two of the New Year.

Possible reasons proposed for this observed historical price rally are: tax considerations, people investing their Christmas bonuses, short-sellers taking their holidays or even increased optimism amidst the festive spirit.

The chart below shows the average returns since 1985. Typically, December is one of the best performing months for both Australian and US shares. This heightened performance over the festive month is likely to be the ‘Santa’ rally in action.

Santa Rally Share performance
Source: Bloomberg, AMP Capital

So, what are the experts saying?

Dr. Shane Oliver, Head of Investment Strategy and Chief Economists at AMP Capital, said the conditions are in place for a ‘Santa’ rally this year.

“…at the end of the day the Australian economy is still growing, the global economy is still growing, interest rates are low and profits are still rising. This suggests to me that we probably will see the normal ‘Santa’ rally, which kicks in usually at the start of December,” he said.

Although, if the US tariffs on China increases from 10% to 25% in the new year that could impact the local share market and derail the ‘Santa’ rally.

“…if investors are worried that tariffs are going to jump up again on January 1 [2019] then that could cause nervousness. As we have seen this year, anything that affects the US economy or the Chinese economy also affects our share market,” Dr Oliver said.

In an article for Financial Review, Lee Mickelburough, Head of Australian Equities at Janus Henderson, said that it will be weak consumer spending over the Christmas period that may disrupt the traditional ‘Santa’ rally.

“I find it hard to see one of those broad-based rallies taking place…,” he said.

“I don’t think its going to be a blockbuster Christmas, the consumer has been pulling its horns in.”


Santa Rally
Will consumer spending be down this Christmas?

Also in an article for Financial Review, Jun Bei Liu, Portfolio Manager at Tribeca Investment Partners, said consumers may be tightening the purse strings.

“The stretched consumer is in a much worse position today. With house prices falling, people don’t feel wealthy and don’t have money to spend,” she said.

If Santa does visit investors this year, we generally see an improvement in the markets midway through December.

“The first couple weeks of December are often a bit flat, it really starts to kick in in that third week, but it is particularly that period after Christmas and before new year that we normally see strength.” Dr Oliver said.

Cover image source: Pack-Shot (Shutterstock)
In-article image source: Nejron Photo (Shutterstock) 

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