July 20, 2024
Investors

Investors are enjoying another ‘Santa Rally’ – but it doesn’t mean a great 2024 for stocks


In his novel Pudd’nhead Wilson Mark Twain cautioned about October, saying: “This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”

Yet even he might have to admit to December’s festive charms, as it is easily the best-performing month over time.

Since its launch almost 40 years ago the FTSE 100 index has gained 2.2pc on average in December; April and July are the only other months to offer an average rise of 1pc or more.

This helps to explain why seasoned investors talk about the “Santa Rally”: the numbers back it up. At the time of writing the FTSE 100 has risen by 3.8pc this December to provide a strong end to a turgid year, during which London’s headline share index has huffed and puffed to no great effect.

A total advance of 3.5pc for 2023, at the time of writing, looks meagre compared with the rip-roaring advances seen in America, Germany, Japan and France, even if dividends, and in some cases share buybacks and merger and acquisition activity, have bolstered total returns.

The questions investors must address now are why the rally is delivering right on time in 2023, and whether it has any implications for 2024 and beyond.

The key reason for 2023’s rally is central bank monetary policy. Our own Bank of England is still playing the miser and fretting about inflation and wage growth even as the economy flatlines, but the financial markets believe that America’s Federal Reserve is primed to hand out goodies in the form of interest rate cuts in 2024.

Jerome Powell, the Fed’s chair, seems to be signalling that the peak has been reached for headline borrowing costs in America at 5.5pc and markets are running with that – they are now pricing in five, or even six, quarter-percentage-point rate cuts in 2024.

Markets also believe that the Bank of England will follow suit, despite its current protestations, and serve up at least four cuts to take the official cost of borrowing down to 4.25pc.

The theory then is that lower returns on cash, and lower yields on government and corporate bonds (as they fall, to some degree, in line with interest rates), make other assets and investment options – notably shares – relatively more attractive.

The idea is also that lower borrowing and interest costs enable consumers, corporations and governments to spend more freely, to the benefit of the economy and companies’ profits and cash flows.

The danger now is that inflation stops slowing down and reaccelerates, just as it did two or three times in the 1970s, thanks to generous wage settlements, oil price spikes and, ultimately, premature interest rate cuts from the Federal Reserve and the Chancellor of the Exchequer (who pulled the levers of both monetary and fiscal policy in Britain back then).

If that is the case, central banks may struggle to deliver all of the interest rate reductions that markets are now eagerly pricing in and that share analysts are factoring into their profit and dividend growth forecasts for 2024.

A further consideration is that for all of its apparent reliability, the London market has fallen just eight times in December since 1984 and only five times since 2000, the “Santa Rally” is not certain to offer anything more than festive cheer. This is because it does not seem to be a reliable indicator for the following year.

The FTSE 100 has served up 11 annual losses since 1984 and 10 of those came after a gain in the December of the previous year.

If anything, some of the best Decembers have led to the most treacherous subsequent years. A buoyant festive season in 1993 was followed by 1994’s Fed rate rise shock, 1989’s knees-up let investors stumble into a recession and a bear market, while 1999’s party led to the hangover that came with the collapse of the technology bubble in 2000.

By contrast, some grim Christmases – 1985, 1990, 1994, 2002 and 2018 – have been followed by cheerful years. Only one of the seven December drops in the FTSE 100 has set a trend for the following year, and that was in 2014.

This December is on course to be the 12th best in the FTSE 100’s 40-year history, albeit with a few (presumably quiet) days still to go. Yet six of the 10 best Decembers served up lumps of coal in the following year and much will depend in 2024 on whether the Fed and the Bank turn out to be naughty or nice when it comes to delivering those interest rate cuts.

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Russ Mould is investment director at AJ Bell, the stockbroker

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