According to spread betting company IG, from 1985 to 2015 the FTSE 100 made an average gain of 2.26% in December, and the Santa Rally phenomenon occurs around 83% of the time. So the statistics favour Christmas cheer from the stock market.

Why it happens

There are several theories about why the phenomenon happens. Perhaps it’s the seasonal goodwill of investors, say some. Others think it’s because lower trading volumes cause exaggerated swings in share prices. Then, it could be because investors are rebalancing their portfolios before the end of the year. Or maybe people are busy investing their Christmas bonuses, and that’s driving markets up. Oh no, say others, the Santa Rally is because investors are hunting for bargains before shares rise in January – known as the January Effect, but that’s for another article!

It could all just be a self-perpetuating event because investors are looking for a Santa Rally. If investors are looking for it, they could jump on any rise in stock prices in December with further buying, and so on.

IG’s back-testing revealed the biggest rises in December tend to occur around the middle of the month, say the 14^th, 15^th, or 16^th, so we could speculate that the rally is likely to start around then. However, it could be early, late, or non-existent, so don’t bet the farm on the possibility of it happening at all this year.

The stage is set

I think the stage looks well-prepared for a rally. The autumn correction took some of the speculative froth out of the market, which I think has strengthened the potential of the upside and weakened the risk to the downside. Well-known fund manager Neil Woodford said in his recent November round-up communication that last month “marked a month of consolidation for most regional equity markets.” Consolidation in markets is good, in my view, because it takes us to what legendary stock trader Jesse Livermore used to call a pivot point. From pivot points, markets tend to move up or down, but it can also mark a point of reversal in direction, which is what we want to see for our Santa Rally.

Woodford said that in November, emerging markets rallied “following a prolonged period of pressure.” There was also, he observed, “a late-month recovery for technology stocks,” which helped the US indices to “finish in positive territory.” I think the strength in overseas markets could help buoy the London stock market, and wherever the US markets go, London tends to follow.

Woodford also pointed out the sentiment of participants in the UK markets has been driven less by economics and more by politics and the long-running Brexit saga. However, markets dislike uncertainty more than anything else, and I reckon as we get closer to the Brexit leaving date of 29 March 2019, the uncertainty will diminish by degrees. It doesn’t really matter whether we end up with a Hard Brexit, Soft Brexit, Full Brexit, Half Brexit, Remainer’s Brexit or a Dog’s Brexit, what matters is that the market knows what’s coming. Maybe Christmas spirit will propel share prices higher as the Brexit soap opera plays out.

The post Why the ducks and reindeers could be lining up for a Santa Rally appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Last year, Santa came through with the goods in a big way, with the FTSE 100 jumping approximately 4% in December. And looking further back, Santa has a good long-term track record of delivering, as the FTSE 100 has risen by an average of 2.4% in December since 1987 – the highest gain of any month – according to research from Schroders.

Where’s Santa?

This year, however, appears to be a different story so far. I don’t know if Santa is stuck at the North Pole right now, or trapped in a chimney somewhere, but he certainly doesn’t seem to be working his magic. 

Yesterday, for example, was a horrible day for UK equities, with the FTSE 100 falling 3.2% and closing at its lowest level in two years. The index traded as high as 7,145 points on Monday, yet yesterday it fell as low as 6,674 points, which equates to a decline of nearly 7% in less than a week.

The reason the FTSE has plummeted this week is that there’s a lot of uncertainty around at present. For starters, there’s Brexit. No one knows how this will play out. Then there’s continued trade war uncertainty, with the recent arrest of Huawei’s CFO stoking concerns that US/China trade wars may not be over. Given this uncertainty, December this year feels very different to December last year. At this stage, it looks as if we may not get a Santa Rally.

Huge yields are gifts for long-term investors

However, for long-term investors, that’s not necessarily a bad thing, in my view. Because, as I explained in this article, if your investment time horizon is five years or longer, then lower share prices and higher dividend yields are actually an opportunity. And looking at the FTSE 100 right now, I’m seeing some absolute gifts in terms of the yields on offer.

For example, let’s start with the oil sector. With the oil price falling recently, investors have dumped oil stocks such as Shell and BP, and that means there are now some fantastic yields on offer from this sector. Investors buying now can pick up yields of around 6.2% from the oil majors, which I think is a steal in today’s low-interest rate environment.

Then there’s the financial sector. Whether you’re interested in banks, asset managers, or insurers, there are some phenomenal yields on offer right now from FTSE 100 financials. Lloyds, for instance, offers a prospective yield of 5.9%. Legal & General offers an even higher prospective yield of 7%. And Aviva is currently offering a prospective yield of nearly 8%.

Looking outside these sectors, there are plenty of other FTSE 100 stocks offering ‘gift’ yields right now. For example, DS Smith, which makes cardboard boxes for Amazon, currently offers a prospective yield of 5.1% while defence giant BAE Systems is now sporting a prospective yield of 4.9%.

With so many 5%+ yields on offer from FTSE 100 stocks at the moment, it’s a great time to be a dividend investor, in my view. I’m not too concerned if Santa doesn’t work his magic this year, as I see the current yields on offer as fantastic buying opportunities.

The post Who needs a FTSE 100 Santa Rally? These yields are GIFTS! appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in Royal Dutch Shell, Aviva, Legal & General Group, Lloyds Banking Group, DS Smith and BAE Systems. The Motley Fool UK has recommended DS Smith and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.