(BFM Bourse) – Between high inflation, the war in Ukraine and an imminent recession, the stock markets suffered particularly in 2022. In this context, investors are hoping for a rise in the markets at the foot of the Christmas tree. This phenomenon of the “Christmas rally” has been highlighted for several decades – but be careful not to take an allegory for a certainty.
The traditional colors of the end of the year are green and red. Like on the stock market. And for now, global indices are dressed in red – like Santa Claus – as December is statistically one of the best months of the year for stock markets.
But the central bankers have decided otherwise and have not made gifts to the markets in recent weeks. The restrictive rhetoric of the European Central Bank and the Federal Reserve on their fight against inflation sent stock market indices shaking. Over the last month of the year, the CAC 40 is currently losing 3.27%, the Dow Jones is behind by 4.5%, where the S&P 500 is down 6.3% and the Nasdaq by 8.65% (performance as of December 22 at the close). So in this volatile environment, were traders wise enough to receive capital gains as a Christmas present?
What is Santa’s Rally?
Numerous studies have shown that the winter period is historically more conducive than summer to a rise in the indices (Halloween/sell in May effect). And the last month of the year stands out in particular: this is called the Christmas rally (in English Christmas Rally).
As early as the 1970s, the pre-eminence of the month of December was popularized by the “Trader’s Almanac” (Stock Trader’s Almanac, one of the first publications to focus on highlighting the different seasonal cycles on the Stock Exchange). The almanac, created by Yale Hirsch and edited today by his son Jeffrey, even highlighted the Santa Claus Rally (the Santa Claus rally, focusing more specifically on the period of the last five sessions of the year and the first two of the new year).
There is no single cause for this runaway market, notes the broker Degiro. This festive mood on the stock markets would be linked to the holiday spirit which “fuels the optimism” of operators at this time of year. With their year-end bonuses in their pockets, investors would also be more inclined to take action on the financial markets. “During this period, institutional investors are on vacation, which gives more influence to individuals, who tend to be more bullish,” adds Degiro.
“Fund managers, who represent a large part of the shareholder base, are rebalancing their portfolios before the end of the year” (“window dressing”) to try to display as much as possible lines of added value among their main positions,” noted David Brett, a former trader then financial journalist, now a columnist at Schroders.
Santa or bogeyman?
“If the month of December was bad, that often presages a bad vintage on the stock market. This was the case in 1956, 1965,1968, 1978, 1980 and 1982 on the Dow Jones”, recalls Christian Fontaine deputy editorial director at the house of Income on the air of BFM Business. Stock market history records this or that trend in the markets. But be careful not to take at face value that the months of October are bad or that it is better to offload your positions in May and do nothing before November, according to the adage “Sell in may and go away”.
“Past performance is not indicative of present performance, and stock market superstitions are only real until they are debunked,” warns David Brett. Moreover, the end-of-year rally effect will soon give way to another somewhat less well-known stock market belief: the January effect, according to which the equity markets rise more in January than in the other months of the year, driven in particular by operators’ appetite for “smallcaps”.
Sabrina Sadgui – ©2022 BFM Bourse