Is the scene set for a Santa Rally?

In the midst of autumn storms, stock markets too have looked unsettled. The uncertainties posed by a US presidential election and Labour’s Budget in the UK have triggered bouts of market volatility from which a clear onward trend has yet to emerge. The FTSE 100 Index, in particular, now shows a broadly sideways movement stretching back to the late spring.

With key political events out of the way for now, investors may be pinning their hopes on a stronger end to the year. That could be a good call. The run-up to the inauguration of Donald Trump on 20 January will give investors plenty of time to take a calmer view of the outlook for companies on both sides of the Atlantic in 2025.

Analysts currently think US companies will grow their earnings by around 15% next year, while tax cuts and deregulation from a Trump-led government have the potential to bolster an already resilient US economy¹.

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While the likely introduction of tariffs constitutes a threat, companies in Europe and the UK are also anticipated to grow their earnings at respectable single-digit rates through 2025². There’s a good chance we’ll see interest rates falling on both sides of the Atlantic next year too, adding to the attractions of shares.

If shares do rally, it won’t be without precedent. The latest analysis from Fidelity shows the FTSE 100 has risen 24 times in December over the last 30 years.  The trend has been almost as striking in America, where the S&P 500 has gained 23 out of 30 times in December³.

Markets have tended to sparkle around Christmas even when traversing periods of distress – for example, during the Global Financial Crisis in 2008 and again during the Covid pandemic in both 2020 and 2021.

December returns for the FTSE 100 and S&P 500 over the last five years

Source: Fidelity International, November 2024. FTSE 100 Total Return in GBP. Past performance is not a reliable indicator of future returns.

The so-called “Santa Rally” is hard to account for on the basis of fundamentals. Among the possible reasons for it is that markets get swept up by a good dose of festive spirit at a time when trading volumes are fading. These conditions make outsized price movements more likely when shares get bought.

Another possible explanation is that investors adjust their portfolios around the end of the year to reflect their expectations for the year ahead. This process may involve the uncovering of mispriced investment opportunities that trigger purchases. Christmas bonus investing is a further possible cause.

It’s worth remembering, however, that trying to time markets on the basis of seasonal phenomena entails taking extra risks compared with a strategy that invests right through a market cycle. Short term effects can be of little practical use due to “round trip” dealing costs. For longer term investors, Santa rallies will have no effect overall.  Diversification, saving regularly and maintaining some cash to capitalise on market dips are more effective tools for the vast majority of investors.

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Past performance is not a reliable indicator of future returns 

Source: Morningstar from 31.10.19 to 31.10.24. Basis: bid to bid with income reinvested in GBP. Excludes initial charge.

Source:

¹ FactSet, 22.11.24
² LSEG I/B/E/S, 19.11.24
³ Fidelity International, November 2024

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of  Fidelity’s advisers or an authorised financial adviser of your choice.