Investing for the Santa Claus Rally

9th December 2013


Edmund Shing considers ways to benefit from the festive statistical effect known as the Santa rally

Some of you may well have already heard of seasonal effects in the stock markets such as the Halloween effect – that the strongest performance of stocks tends to occur between the beginning of November and the end of April each year. This also gives rise to the well-worn stock market adage: “Sell in May and go away.”

Well, we can be even more specific than that! The best stock market performance of the year, as judged by discrete four-week periods, tends to occur statistically over the last two weeks of December and the first two weeks of the New Year – the so-called “Santa Claus rally”.

UK Stocks Do Well Over December-January

Source: FTSE, Bloomberg, Author’s calculations. Period taken: 1996-2013

Looking over the period 1996-2013, we can see from the first chart above that the 4-week period starting in December (week 49) and stretching into the following January have typically been the strongest of any 4-week period during the UK stock market year, with the FTSE-100 gaining on average as much as 2.5% in 4 weeks taking in the Christmas/New year festive period.

However, note in the second chart above that the 4-week performance is even stronger for UK small-caps, with an average gain of as much as 4% from mid-December (week 51) to mid-January.

Emerging Markets: Another way to benefit from Santa’s largesse

In addition to small-cap stocks, another way to benefit from the Santa Claus rally is to invest in emerging market stocks: the chart below of the average 4-week price performance by week for the MSCI Emerging Markets index shows that again, holding emerging markets stocks from the second week in December (week 50) for 4 weeks typically delivers the best performance of any 4-week period during the year.

Santa also likes Emerging Markets


Source: FTSE, Bloomberg, Author’s calculations. Period taken: 1999-2013

Here you have two choices: you can either just buy an ETF or fund that invests in this overall MSCI Emerging Markets index, or you can look at which emerging markets in particular are currently moving higher. Over November and the month to date, the best emerging stock markets have been:

China, India, and Israel

(although strictly speaking, Israel is not an emerging market any more, now being classified instead with developed markets)

Ways to play this statistical effect

There are several ETFs and investment trusts that we can use to potentially benefit from this anticipated Santa Claus rally:

UK Small-Caps: You could go either for the iShares MSCI UK Small-Cap ETF (CUKS), or one of a number of UK Small-Cap investment trusts such as the Schroder Mid & Small Cap Fund (SCP), the Standard Life Smaller Companies Trust (SLS) or the Henderson Smaller Companies investment trust (HSL);

Emerging Markets: there are the London-quoted iShares MSCI Emerging Markets UCITS ETF (SEMA) or the SPDR MSCI EM Asia UCITS ETF (EMAS), if you prefer to invest just in Asia;

Single country ETFs/investment trusts: Focusing on the best performers of the moment, iShares offer a China Large-Cap UCITS ETF (FXC), or if you prefer to invest in Indian stocks, then there is the JPMorgan Indian investment trust (JII), which currently sits at a 14% discount to its underlying net asset value, according to the Association of Investment Companies’ statistics website.

Note however that in this article I am merely commenting here on the statistical effect that is the Santa Claus rally. You may wish to add into this investment mix your own macro fundamental analysis in determining which investment you prefer to hold over the festive period.

5 thoughts on “Investing for the Santa Claus Rally”

  1. Jason Dickens says:

    I like the suggestion of using country ETFs – and certainly as you suggest in the final paragraph, this is simply a statistical tendency and should be combined with other analysis and sound risk management before you put money on the line. I’ve posted some useful stats on cumulative returns for the Santa Rally here:

  2. David Lilley says:

    This is sound advise. But as Shaun Richards is always pointing out; every accepted rule seems to come a cropper in what he refers to as the credit crunch era.

    I have the benefit of hindsight. You wrote on the 9th December and it is now the 14th December and we have experienced a week when the FTSE 100 has lost 6.6%. Some Xmas rally.

    None could have predicted that “The IEA slashed its outlook for global oil demand growth for 2015 by 230,000 barrels per day to 900,000 bpd on expectations of lower fuel consumption in Russia and other oil-exporting countries.” That’s a 20% drop.
    Can this be true? Not at all.
    Any study is 1/3 study, 1/3 writing up and 1/3 review if you have a deadline. How old is the study portion of their report? A month makes a lot of difference here.
    The IMF surveys its members and comes up with a drop in global GDP of 0.1%. Yet the IEA surveys its members and comes up with a 20% drop in oil demand. GDP and oil demand should be mirror images but they depart by 200%. Someone is wrong.
    A 50% fall in the price of oil is whoopee for oil importing countries and well deserved missery for the OPEC cartell. We only found oil here there and everywhere because their illegal market distortion pushed up the price so much that it was worth our while to explore and produce even in one mile water depth.
    To me, the big question is why should everything fall and not just oil related stocks? Surely every other industry in an oil importing country should gain?

    1. Noo 2 Economics says:

      “…it is now the 14th December and we have experienced a week when the FTSE 100 has lost 6.6%. Some Xmas rally.” If your’e alreday in wait ubtil the period between Christmas and New Year or early New Year and review your holdings then. Any one who decided to buy when the Ftse was around 6200 will do even better. I was waiting for 6000 but look to have missed the boat – hey ho!

      “To me, the big question is why should everything fall and not just oil
      related stocks? Surely every other industry in an oil importing country
      should gain?”

      It’s called panic, markets now worry how far the oil price will fall and if this fall will become contagious to other markets and global GDP. Many now argue that demand has collapsed – just look at the oil price.

      I disagree, rather when we were in the middle of the so called “commodities supercycle” a few years ago everyone believed it was an unstoppable train including mining and oil companies, so a lot more exploration was commissioned, new fields identified and development of those fields commenced on the strength of the “Supercycle”. Fields have come on line only to find that demand hasn’t been growing exponentially as the analysts forecast a few years ago, instead it has been growing slowly. So now it’s labelled a “collapse in demand” when what it really is, is oversupply due to fantasy future demand predictions made a few years ago. Currently, the market can’t see past it’s collective nose but will work out that oil fall will of course produce a rebound in economic GDP of oil importing countries. It may take a while but the market will get there eventually so take your positions now whilst prices are soft and then wait.

      1. David Lilley says:

        Nice to hear from you again Noo.

        I don’t have a nom-deplume and I am embarrassed to see my name again and again in the comments.

        1. Noo 2 Economics says:

          You could always adopt one David and even argue the converse of arguments used under your usual name.

          “Noo 2” became a trademark name for me when I was registering for the Ubuntu forums and desperately trying to find a name no one had used before. It stuck and is always the name I use for any forum I join with the subject tacked on the end (e.g. “Ubuntu”) although in reality I was “Noo 2 Economics” in 1977!!

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