As festive lights turn on, we explore the notion of the Santa rally. Existing in limbo between technical analysis and behavioural finance, the myth of a robust December, year-in, year-out, persists. What can we say about this phenomenon? Are Decembers really more profitable than other months? Which indices benefit the most? Are there sectors that consistently deliver stronger returns than others? Finally, do US election years amplify the St Nick effect? As geopolitical and political situations intensify, let's look at reasons to hope this year-end will bring festive cheer to diversified portfolios.
Santa Claus is comin’ to town
Our analysis of MSCI index returns since 1970 leaves little room for doubt: Decembers outperform. This is illustrated by two points:
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The long-term average return from global stocks in December is 1.9%, more than double the long-term monthly performance of 0.64%1
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For December, the frequency of positive monthly performances is 73%, higher than the 60% for other months. |
The December anomaly is too strong to be ignored – especially if you’re a diversified investor – with the ‘Christmas premium’ of 1.26% for world stocks providing a nice bonus to ride out the year.
On top of that, focusing on the 13 US election years since 1970, we find that many indices perform even more strongly. For example, the outperformance of the MSCI China in December typically reaches 1.47% but exceeds 4% on average in US election years.
For global stocks, the effect of US elections on performance is modest but the frequency of positive returns rises. So far, 85% of Decembers in a US election year experienced stronger returns. The only two cases of negative performance were in 1980, following Ronald Reagan’s election amid a brewing recession, and in 1996 when Bill Clinton was re-elected.
In years of already strong performance, Decembers become even more generous (though less common). When the performance of global stocks has topped 10% by the end of November, the average December return is more than 2.5% and is positive in 78% of cases. This suggests the December effect can most likely be attributed to a herd mentality encouraging investors to chase a runaway year. (This generally occurs against a backdrop of share buybacks.)
No matter your angle of analysis, or whether you’ve been naughty or nice, December is an extraordinary month for investors across a number of regions (see Figure 1). However, do all stocks take part?
Read also: multi asset: how higher rates could improve diversification
FIG 1. The December premium: average equity returns and the percentage of months with positive returns by region (top) and sectors (bottom)2
Christmas cheer does not discriminate
Figure 1 also highlights several details about December rallies across sectors and geographies. Some elements may seem interesting given the heterogeneity in regional and sectoral stock market performance this year:
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First, most sectors and geographies seem to benefit from the December rally. This is good news for the many institutional investors who haven't opted for concentrated exposures in 2024
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Geographically, emerging markets and European large caps perform better in December than US stocks. When analysing the results, we find this success corresponds with US dollar weakness in December, against a backdrop of easing short-term rates. This makes sense: assets impacted by a stronger US dollar benefit when it declines
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For sectors, the differences are less noticeable. Most sectors and styles perform well in December, with Technology and Energy lagging. Value usually outperforms growth and small caps.
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These findings are clearly based on historical performance, and December 2024 will add new data. However, if the outperformance of sectors, geographies and styles is consistent with past patterns, a Santa rally would bring more homogeneity to abnormally concentrated market returns in 2024. We should also note that among the 13 negative Decembers in our data set were the worst year-end months since Bretton Woods, including 2002 (the bursting of the tech bubble), 2018 (US-China trade war), and 2022 (aggressive interest-rate hikes). The damage caused to portfolios in these years warrants some caution each December.
What this means for All Roads
For now, the allocation of our multi-asset strategy continues to show high diversification among bonds, stocks and commodities. Should the December rally come, our allocation would likely benefit – particularly if long-term rates ease, as this would support bonds. Since our allocation is not concentrated, the prospects of a classic broad and homogeneous Christmas rally would enable us to end the year strongly. That said, commodity trends remain unstable and sensitive to geopolitical tensions, which are very unpredictable. Once again, this reinforces our focus on diversification and dynamic drawdown management, should a December freeze befall markets.
Simply put, history shows that Santa often visits markets in December, benefiting cyclical assets. But the years in which he disappoints warrant diversification.
To learn more about our All Roads multi-asset strategy, click here. Macro/nowcasting corner
The most recent evolution of our proprietary nowcasting indicators for global growth, global inflation surprises, and global monetary policy surprises are designed to track the recent progression of macroeconomic factors driving the markets.
Our nowcasting indicators currently show:
- Our growth signals continue to highlight the current recovery climate, with 57% of data showing improvement over the month
- Our inflation signals are clearly shifting. Whereas just a few weeks ago inflation surprises were positive and increasing, they are now positive but decreasing, a positive signal for government bonds
- Monetary policy should remain accommodative, regardless of which region we analyse. In the US, the recent Federal Open Market Committee minutes are consistent with the message coming from our indicators.
World growth nowcaster: long-term (left) and recent evolution (right)
World inflation nowcaster: long-term (left) and recent evolution (right)
World monetary policy nowcaster: long-term (left) and recent evolution (right)
Reading note: LOIM’s nowcasting indicator gather economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).
