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What is a Santa Rally, and will we have one this year?

·4-min read
A generic chart showing stock prices going up and Santa pointing at the chart looking happy.
Markets usualyl get a bit of a boost this time of year, so why haven't we seen it yet? (Source: Getty)

The holiday season is upon us, but the markets have not seen the boost it usually does at this time of the year.

Dubbed the “Santa Rally”, markets usually see an uptick around the end of December finishing off the year on a positive note.

But, this year, markets have been weighed down, with the ASX losing around 1.4 per cent in the past month.

So, what is a Santa Rally, why does it happen and why aren’t we seeing it this year?

Yahoo Finance asked the experts.

What is a Santa Rally?

A Santa Rally is when the market gets a boost in the lead-up to Christmas.

Mathan Somasundaram, CEO of Deep Data Analytics, said a Santa Rally was caused by the fact that a lot of fund managers were away for the holidays so, at-home investors (also known as retail investors) took over.

“The year-end Rally usually happens with weak volumes as fund managers are away and retail takes over,” he said.

“Fund managers are also likely to buy into the year end to boost their performance and outperformance fees.”

Another factor is that it is tax time in the United States.

“US fund managers like to pump the market for a good marketing pitch for the next year. It’s in between reporting cycles and no real macro data out…so you have clear air,” Somasundaram said.

But as chief economist at AMP Capital Shane Oliver pointed out, the Santa Rally was not foolproof or guaranteed.

“It’s only happened around seven times in the last 10 years and it didn’t happen last year either,” he said.

“I suspect the rally happens as a combination of people feeling more optimistic about things as the year comes to a close. People tend to be feeling happier around Christmas and New Years and it leads to more investment.”

Kyle Rodda, market analyst at IG Markets, told Yahoo Finance the Santa Rally was likely a combination of a few things.

“The Santa Rally is a bit of a mysterious thing. It’s probably a combination of myth and fact,” he said.

“November and December tend to be good months for equities globally, even if not the best months for the year for equities. November, on average, is a bit stronger.”

Rodda said if you looked at the past 20 years or so for Australian and US stocks, the average return was 1.39 and 0.72 per cent respectively.

“There’s probably multiple reasons for why this happens,” Rodda said.

“A part of it is probably window dressing from portfolio managers – increasing exposure to stocks going into year end to maximise returns - a sort of swing-for-the-fences mentality.”

Why haven't we seen a Santa Rally this year?

Basically, it comes down to what is happening globally.

The United States Federal Reserve is beginning to wind back its stimulus, inflation pressures are building and the spread of the Omicron variant has investors spooked.

“The US is now in a downgrade cycle on an economic and stimulus basis. It really comes down to what China does in the near term,” Somasundaram said.

“It seems that they are just putting out a small stimulus buffer as more reform ripple effects hit the economy.”

And of course, concerns about more global lockdowns as a result of Omicron have been weighing on the markets, Oliver said.

“Some countries in Europe have already put more lockdowns in place,” Oliver said.

“And then you have issues like inflation, and central banks raising interest rates. So, all those things are leading to a bit of uncertainty.”

But, just because there is a lot of uncertainty doesn't mean a rally isn't possible, Oliver said.

“We may just see. If in the next couple of days we find out that the Omicron variant isn't causing a huge surge in hospitalisations, then investors may start to breathe a sigh of relief,” he said.

“But that’s what we haven’t seen so far. History suggests we usually see a rally between now and the end of the year. But, again, these things aren’t foolproof.”

Rodda said, barring some unforeseen positive surprise, it wasn’t’ likely stocks would rally as seen in previous years.

“It seems equities have run out of puff after what’s been a really strong year,” Rodda said.

“And as far as current macro risks go, everyone is wary of a slowing expansion and tighter monetary policy, with last week’s Fed meeting probably only exacerbating that.

“My sense is we are probably going to see a slightly volatile end to the year with a bit of choppy price action, and that could bleed into the start of next year, too.”

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