Santa Claus makes his annual visit
Investors must have been good last year – the Santa Claus rally, so often a feature of end-of-the-year stock market trading, made an appearance once again.
For the uninitiated, the Santa Claus rally is a phenomenon well-documented by stock market historians over a lengthy period. More often than not, share prices seem to spike upwards over the Christmas period, no matter how well or badly the market was performing in the run up to the festive season.
The precise figures depend on the period you consider. Traditionally, the Santa Claus rally was supposed to take place in the trading days between Christmas Day and New Year’s Day, but some analysts also include data from the first couple of days of the new year, since the spike generally seems to endure. More broadly, December consistently seems to be one of the best performing months of the year for the stock market.
The effect was first documented in the US, where historian Yale Hirsch noted in 1972 that prices had risen over Christmas in 77 per cent of the years going back to the 1890s. That long-term average has barely changed since then; according to historical data going back 1896, the US market has gained, on average, 1.7 per cent during the seven trading days following Christmas Day.
In the UK, meanwhile, the figures are similar. Data from the Stock Market Almanac, albeit only going back to 2000, suggests our shares have averaged a return of around 1.5 per cent over the Christmas period. This year was even better, with a Christmas period return of around 2.3 per cent. Santa Claus appears to have worked his magic once again.
To all of which, you might very well say, so what. Long-term stock market investors shouldn’t be too concerned with what the market tends to do over a handful of days at the end of the year; that’s the sort of trend traders get excited about, but won’t help you much with sensible financial planning.
Still, there are a couple of things the Santa Claus rally may tell us. First, the historical statistics suggest that if the rally doesn’t take place, the prospects for the following year as a whole are poor. The Americans even have a phrase for this: “If Santa Claus should fail to call, bears may come to Broad & Wall”. So the fact we did have good gains over Christmas at the end of last year might offer some reassurance.
The more significant point is that the strong gains seen over a handful of days is a powerful reminder of the risks of trying to second guess the stock market. Get it wrong and there’s a real danger you’ll miss out on an important chunk of performance; over time, the effect of compound interest foregone on that performance will really add up.
The results can be dramatic, as a bit of number-crunching conducted by Fidelity over the past 30 years of market returns reveals. Assuming you’d invested £1,000 at the start of that period, Fidelity says being out of the market on the 10 best days would have reduced your final return from £14,700 or so to just £7,800 – an opportunity cost of £6,900.
The bottom line? Whether you believe in Santa or not, it’s time in the market that matters, not market timing.