Will investors benefit from a 'Santa rally' this year?

It's been an unpredictable year for stock markets but investors are hoping for an end-of-year boost in the form of a so-called Santa rally.

Shares have delivered a mixed performance so far in 2023, amid high inflation and interest rate hikes, so while children are "compiling their Christmas lists", said Dr Matthew Partridge in MoneyWeek, "traders also want a gift". 

Traditionally, "festive cheer and holiday household spending make the markets more optimistic" during the holiday season, boosting investor portfolios. But will 2023 follow the trend?

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The Santa rally explained

The "Santa Claus rally", a term coined in 1972 by Yale Hirsch, the founder of the Stock Trader’s Almanac, "describes a tendency for the stock market to go up by 1% to 2%" over final five trading days of the outgoing year and the first two of the new one, said Forbes Advisor. 

This period has "historically" shown higher stock prices in the S&P 500 79.2% of the time, said Investopedia.

The term has "broadened" in recent years, though, to cover the entire month of December, added Partridge.

It has also gone international. Between 1985 and 2015, the FTSE 100 has returned an average gain of 2.26% during each December, rising in value 83% of the time, said IG.

What drives the Santa rally?

Reasons for the Santa rally vary and "all could have some truth behind them", said Trustnet. 

One explanation is the cheery "end of year mood" that means investors are in more of a "buying temperament" rather than selling shares, which pushes up stock prices, said the investment website.

Jason Hollands, managing director of investment platform BestInvest, suggested the rises may come from fund managers investing spare cash before the holiday or taking a "position for the year ahead", said MoneyWeek, or could be hedge funds "closing out positions".

Will there be a Santa rally this year?

November "capped off the best three months" for global shares since the pandemic stock market recovery in 2020, said Proactive Investors. 

There are hopes that momentum in the markets, helped by a "'soft landing' from interest rate hikes", could mean the "much-feted Santa rally" pushes prices higher in the run-up to Christmas. 

Meanwhile, the FTSE 100 in the UK has also made a "positive start" to December, said Citywire, as investors "become more bullish" about interest rate cuts.

Many stocks have "burst into life on both sides of the Atlantic" since inflation looked like it was peaking, said Kevin Godbold on Motley Fool. With several economies avoiding recessions as well as commodity and energy prices improving, he said a Santa rally "looks likely".

There is "no guarantee", though, said Trustnet. The odds of a Santa rally may be in its favour, added the financial website, but the "best option" is to do nothing, remain invested and be "pleasantly surprised" by another strong month by the new year.