Will this year's Santa rally take place?

This month's Santa rally might boost the stock market and add some festive cheer to your portfolio

Will investors see one this year, though?

When December arrives, experienced investors usually have one question on their minds: will there be a Santa rally this year?

The tendency of stock markets to rise as the holiday season approaches and consumer spending increases is referred to as the "Santa rally." Additionally, this causes optimistic investors to increase their holdings of the best stocks and funds.

December has been the FTSE 100's best-performing month of the year, with an average return of 2.1 percent since 1984. The only other months of the year with an average gain greater than 1% during that time are April and July.

Russ Mould, investment director at AJ Bell, explained, "If you want to know why markets talk about the Santa Rally, that is because the numbers back it up."

However, Mould warns that although the Santa rally effect can make December a positive month for the stock market, it frequently portends a worse year to come.

"Since 1984, the FTSE 100 has experienced 11 annual losses, 10 of which followed a gain in December of the prior year," he stated. "The only exception was 2015, when an annual decline of 4.9 percent followed a 2.3 percent decline in December 2014. A "

Some of the largest Santa rallies in history have preceded severe market downturns, like the 1994 shock rate hike by the Federal Reserve, which came after a prosperous December 1993.

The FTSE 100 experienced one of the few gloomy December months last year (2024), falling 1.4 percent. However, as of the end of November, the index has increased by 18.9 percent this year, highlighting the idea that a gloomy December does not always translate into a miserable new year. We also examine potential investment destinations for 2026 in a different post.

How frequently do Santa rallies occur?

According to the data, stock markets do typically increase in December. According to Fidelity International's analysis, the SandP 500 increased in 22 of the previous 30 December returns, while the FTSE 100 recorded a positive return in 24 of the previous 30.

An illustration of the FTSE 100 and S&P 500's December returns from 1995 to 2024.

It's less obvious why that occurs. Santa rallies are a result of investors' optimistic mood during this season, according to Jemma Slingo, a pensions and investment specialist at Fidelity International.

"As the year comes to an end and investors look forward with a sense of renewal in the new year, optimism tends to build," she said. "Thin trading volumes, Christmas bonuses, and festive optimism are frequently mentioned as contributing factors. The "

Investors used to anticipate a January effect, according to Mould, in which financial advisors would use their clients' money to boost the stock market in the coming year.

Mould believes that the Santa rally effect may have started when investors tried to predict the January effect ahead of time, even though this no longer occurs.

This year, should you expect a Santa rally?

Santa rallies are common, but they shouldn't be overly relied upon, just like any seasonal investing trend, like the sell-in-May approach.

According to Slingo, "seasonal patterns like the Santa rally do not replace a long-term investment plan, but they do offer an insight into how investor psychology can drive markets." "Even during uncertain times, like financial crises, referendums, or pandemics, December has frequently rewarded those who stayed invested instead of trying to time the market," she continued.

However, there are some grounds for joyful optimism, especially with regard to the US stock market.

"At least a few barriers to Rudolph's flight path have been removed with expectations firming of a December rate cut and the US government shutdown resolved," says Derren Nathan, head of equity research at Hargreaves Lansdown.

Slingo notes that although the year has been good for stocks overall, with double-digit gains in both the US and the UK, there are indications of growing anxiety because the VIX indexoften referred to as the fear gauge because it measures stock market volatilityhas increased dramatically in recent weeks.

"History shows that investors who stay the course tend to be rewarded over time, but no one can predict whether the Santa Rally will return this December," Slingo stated. "The best gifts investors can give themselves are discipline and perspective, even though the holiday season can bring both volatility and opportunity in equal measure. A "