Investors looking for some Christmas cheer may well have been eyeing a Santa rally to end what has already been a stellar year for global equities.
Stock market analyst Yale Hirsch coined the term Santa Claus Rally in 1972, referring to the general trend of markets to rise in the last week of December, largely due to more retail activity.
Now it is generally used to describe the period from Black Friday to the end of the year.
The Santa rally refers to the tendency of stock markets to rally over the last few weeks of December
While the rally may seem a mythical, if not self-fulfilling, phenomenon, data does show markets tend to surge in the period.
Analysis by investment platform Bestinvest reveals global equities have delivered positive returns 80 per cent of the time in December, far higher than any other month.
In the UK it is even slightly more pronounced, with December delivering positive returns 83 per cent of the time.
Investors have already seen stellar returns in recent weeks as markets brush off the worst of the pandemic.
But the emergence of the Omicron variant, which has jolted scientists and the markets alike, may stymie further growth. Could markets retreat further and stop a Santa rally in its tracks?
The Omicron effect
December has often been one of the best months of the year for stocks given consumer appetite and a healthy earnings season.
But markets pulled back from all-time highs this week following comments from Moderna’s boss that current vaccines will struggle against this newest coronavirus strain.
Will the lack of clarity on the severity of this new strain completely end chances of a rally?
Source: Bestinvest / Lipper Investment Management. Data from January 1982 – October 2021. MSCI World Index, Total Return in Sterling, dividends reinvested.
Chris Beauchamp, IG’s chief market analyst tells This Is Money, people seem to be more optimistic ‘and the pullback over the past week has certainly helped ease fears that the rally had already happened’.
Was there a Santa rally in 2020?
Despite the pandemic and near global economic shutdown, Santa managed to deliver.
Global equities rallied with US stocks recorded their second successive rally over Christmas last year. It came after a bleak 2018 which saw US stocks return minus 9 per cent in December amid trade tensions with China.
Global equities have delivered an average capital return of 1.68 per cent in December over the last 40 years, according to Bestinvest’s analysis. T
The average return in the UK is higher at 2.18 per cent, rising to 2.37 per cent once dividends are included.
Last year the FTSE 100 suffered its worst year since the financial crisis, losing 14.3 per cent over the course of the year.
Surprisingly, however, the blue-chip index gained 1.18 per cent over the course of December and 2.01 per cent over the period between 24 December and 5 January.
But the uncertainty of the outcomes on both transmissibility and severe diseases will continue to drive price action for weeks, regardless.
‘It all depends on how severe it is, or how quickly it spreads. We don’t really know enough on either of those points, and as the [pharmaceutical companies’] CEO comments over the past two days are anything to go by most people don’t know either,’ says Beauchamp.
Chances of a rally over December seem largely dependent on these factors though, so until there is clarity from scientists it is likely to continue to cause volatility.
Will Hobbs, chief investment officer of Barclays Wealth, strikes a more optimistic tone on the effect on investors.
‘Whatever the outcome, it is worth remembering that this is not February/March 2020, when we had no vaccines, no treatments, we knew precious little about the virus or indeed the policy maker response.’
‘All told, don’t panic. Even the darker scenarios are irrelevant from a longer term returns perspective. When you are buying a share in a company, or index of companies, you are not just accessing this year’s cash flows, but all of them.’
Is inflation a bigger factor?
If the strain proves to be more transmissible but causes less severe disease Hobbs suggests it may beat prior expectations ‘and therefore higher growth and lower inflation than currently assumed.’
Inflation has haunted markets in recent months. In the UK, the cost of living surged to a 10-year high in October to 4.2 per cent. It is now more than double the target set by the Bank of England.
Similarly in the US, consumer confidence is at its lowest level in a decade because of inflation, as the rate surged to 6.2 per cent in October, its highest level since the early 90s.
The impact of this new variant and the prospect of fresh restrictions could well exacerbate inflationary pressures.
Indeed the chair of the Federal Reserve Jerome Powell this week warned Omicron raised uncertainty around inflation and has ditched the ‘transitory’ label.
Powell also indicated the central bank is likely to discuss speeding up the tapering of its asset-buying programme, which the markets have taken as a change of tone towards tighter monetary policy.
Source: Bestinvest / Lipper Investment Management. Data from January 1982 – October 2021. MSCI World Index, returns in Sterling.
Hobbs says: ‘Omicron could easily send inflationary forces in either direction. The plunge in energy prices, an important input into inflation, this last week points to the variant’s deflationary potential.
‘However, you could also see important areas of production closed around the world. China is obviously a key area to watch here, both in terms of its zero Covid strategy and importance to global manufacturing and supply chains.’
Elsewhere, investors may look at the upcoming US jobs report and how well the retail sector is performing to gauge how likely an end-of-year rally is.
That said, the incoming economic data will be largely futile in the wake of the Omicron news so transmissibility and vaccine efficacy will remain key to understanding where the markets may head.
The Omicron variant is not the Christmas present most investors had in mind.
It may well be that investors will have to brace for a few more weeks of uncertainty.
But, while investors know past performance is no guarantee of future results, the case for a December surge has usually been a strong one.
It has been a strong year for markets regardless: the S&P 500 is up 22 per cent while the FTSE 100 has gained 8.5 per cent since January.
Whether or not Omicron proves to be a storm in a teacup or it brings a new lockdown, it may have little effect on the year ahead.
Hobbs says: ‘For the moment, our (always cautiously) optimistic view of the year ahead is unaltered by Omicron.
‘If anything, Omicron changes the timing of some of the positive forces we expect to build, from corporate capital expenditure to consumers deploying some of those pandemic accrued excess savings.’