‘Santa Claus’ Share Market Rally in 2016?

The Australian share market enjoyed its best November in 11 years. But will this upward trend continue into December with the traditional Santa Claus rally?

November is typically one of the worst-performing months of the year for the Australian share market.

Over the past decade, on average the benchmark S&P/ASX 200 index has fallen in November by 2 per cent.

But 2016 has broken that trend, with the index finishing the month at 5,440.5 points – a 2.8 percent gain for November.

Driving a lot of this positive movement has been the stimulatory economic promises of US president-elect Donald Trump.

Some forecasters had predicted global stock market falls of five to 10 percent in the instance of a Trump win in the US presidential election, but so far the effect has been quite the opposite in Australia.

The S&P/ASX 200 index initially fell 101.2 points on the day Trump was elected (9th of November), but since then it rose 283.9 points till the end of the month.

But will the good times continue into December with a Santa Claus rally?

What is a Santa Claus Rally?

The “Santa Claus rally” refers to the historical trend of share prices rising around Christmas time.

The term was first coined in 1972 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 for this price rally are varied, such as tax considerations, people investing their Christmas bonuses, short-sellers taking their holidays or even increased optimism amidst the festive spirit.

Over the last 34 years, the Australian S&P/ASX 200 index has had 29 December rises, three December falls (1990, 2007, 2011) and two sideways Decembers (1987, 2008), according to Senior Private Wealth Adviser for Phillip Capital, Shane Langham.

You could say that gives an 85 per cent chance of a Santa Rally in 2016, but of course, past performance should not be an indicator of future performance.

So what are the experts saying?

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Will there be a Santa Rally in 2016?

“We anticipate shares to be higher by year’s end as seasonal strength kicks in…”

In an outlook piece for Switzer Daily, AMP Capital Chief Economist Shane Oliver warned that shares are now overbought and due for a pause but was upbeat about how the market would finish the year.

“We anticipate shares to be higher by year’s end as seasonal strength kicks in (the “Santa rally”) and see share markets trending higher over the next 12 months helped by okay valuations, continuing easy global monetary conditions, a shift towards fiscal stimulus in the US, moderate economic growth and the shift from falling to rising profits for both the US and Australia,” he said.

“This kind of positive move could set the scene for a Santa Claus rally…”

Also in an article for Switzer Daily, CMC Chief Market Strategist Michael McCarthy wrote on the 22nd of November that if the ASX 200 moves past 5,385, the scene could be set for a Santa Claus Rally. As at December 1, the ASX 200 is at 5,500.

“I’m sticking to my year end call of 5900, if somewhat nervously. While a number of factors will need to fire, it is still an attainable level for the index,” he wrote.

‘A sucker’s rally’

Watermarket Funds Chief Investment Officer Justin Braitling told Fairfax the post-Trump rally is sending a false signal to investors.

“The rally in shares will probably last through Christmas, with the typical Christmas rally, but we think it will prove to be a sucker’s rally,” he said.

“The backdrop for sustainable growth weakens while uncertainty is clearly on the rise. This is a less than favourable development in the risk/return trade-off for shares. Given elevated valuations, risks are accumulating in shares.”

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