The Santa rally turns into a Scrooge slump: Investors suffer a bad start to December, so can the market bounce back?

By Marc Shoffman for Thisismoney.co.uk

Published: 04:54 EDT, 15 December 2014 | Updated: 12:26 EDT, 15 December 2014

Investors hoping for a Santa rally have been hit by a Scrooge slump so far this December.

Friday's stockmarket dive of 2.49 per cent finished off a bad week at the office for the FTSE 100 index. It meant that the Footsie slid 6.6 per cent from Monday to Friday - the worst weekly performance since August 2011.

The market opened up this morning before reversing and taking another 1.9 per cent tumble to close at its lowest level in 2014 of 6,182.7.

Investors will now be questioning whether the traditional December bounce for shares will arrive - or fears stoked by the oil price plunge mean the stock market's Christmas is cancelled. Falling down: The FTSE 100 has taken a sharp tumble since the start of December

What is the Santa rally?

Markets traditionally get a festive boost towards the end of the year, in what has become dubbed the Santa rally.

Since the FTSE 100 was created in 1984 the index has increased by an average of 2.5 per cent during the month of December and has only fallen four times during the month in 28 years - the last time being December 2002.

But falling oil prices, troubles in the eurozone and reduced economic output figures in important areas such as construction have all weighed heavily on the markets.

There has also been plenty of negative news in the retail sector, with Tesco issuing a fourth profit warning and Marks & Spencer reporting delivery delays.

Research from S&P Dow Jones Indices shows all regions experience a boost in December.

But this doesn't necessarily come in the initial part of December. Adrian Lowcock, of Axa Wealth, says the last two weeks of the year are statistically the strongest two-week period of the whole year.

But Jason Hollands of Tilney Bestinvest has his doubts: ‘The so-called Santa Rally does have some statistical merit though I've yet to hear a convincing explanation, just general theorising about brokers and fund managers wanting to boost year-end bonuses.

'It may be partially influenced by hedge funds closing out short positions.’ Markets: Data from Standard & Poors shows markets have on average been boosted each December

Will this be the year of the Scrooge slump?

Markets are very sensitive to any economic data at the moment. Falling oil prices have hit energy shares and confidence has been dented by unexpected weakness in Britain’s construction sector in October. Scrooge: Are we too late for a Santa Rally?

Garry White, of broker Charles Stanley, says the rally usually comes in the run up to Christmas, but has failed to materialise so far this year because of the FTSE 100's high exposure to to commodities.

Oil companies and services groups were hit by Brent crude prices falling more than 9 per cent last week.

There are also concerns about what is going in across the pond in America with the end of its quantitative easing - and the threat of rising interest rates being triggered by the economy's good performance.

At 6,340 this morning (Monday 15 December), the FTSE 100 was down 2.8 per cent on a year ago and down almost 8 per cent on its early September highs

It hit its lowest level this year in mid-October, of  6,195.9 and Friday's 2.49 per cent slump saw it close just 105 points above that.

With only a couple of weeks left until the end of the year, the markets will need a lot of good news to make up for their recent poor form.

In the run up to Christmas we still have inflation and house price data to be released which could give markets a boost.

A response to lower share prices could also be a flurry of buying activity. The stock market has show resilience over the past few years with many major lurches downwards followed by a bounce back, as investors buy on the dips.

October's savage sell-off was followed by a rapid bounce back, with the FTSE 100 climbing back up to above 6,700 in a month - a rise of 8 per cent.

Darius McDermott, of Chelsea Financial Services, is still positive about the markets regardless of a rally, he says: 'The weak oil price has weighed on markets in December and may continue for a little while yet, diminishing hopes of a Santa Rally.

'However, markets have suffered brief setbacks recently but have resisted going below 6,000. If markets reach the the 6,000 to 6,200 range I would view it as a buying opportunity.'

Chris Williams. of advisory firm Wealth Horizon. says if you are a long term investor, the rally doesn’t matter.

He says: ‘Santa’s rally doesn’t always arrive, and negative Decembers certainly aren’t out of the question. Higher than average growth does not, necessarily, mean a reduced risk of loss.

‘Each version of the Santa Rally will have a different set of statistics behind it. Different dates and different time periods can produce completely contradictory results, so it’s always a good idea to look at any figures with a degree of scrutiny.

'Does a certain time frame avoid a big stock market crash? Is the index being looked at a fair indication for all or is it an isolated market?

‘And so, to the important question; what does this all mean for your investments? The answer, probably not that much.’

Time in the market, rather than worrying about one month's performance may be a better strategy, according to Laith Khalaf of Hargreavse Lansdown.

He says £10,000 would be worth £21,600 today if invested for every December since 1984

However it would be worth £186,100 if invested for the entire period

He explains: ‘The ring of sleigh bells is notably absent from the UK market so far in December, and any rally has to overcome significant negative sentiment. Statistically the Santa Rally is as hard to dismiss as it is to explain, however investors would be better served by staying in the market for the long term, rather than playing the hokey-cokey with their money on a monthly basis.

'Currently the UK market looks decent value if you consider long term company earnings. In the short term the UK election is likely to add some volatility. However longer term a lower oil price will gradually put more money into the pockets of consumers and many businesses, which could provide a boost to economic activity, and corporate profits outside of the oil production sector.’

The table below, from Hargreaves Lansdown, shows how the FTSE has performed each month of the year on average.

December stands out as the best, but April also has a decent 2.2 per cent return.
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