Should investors ho-ho-hope for a FTSE 100 Santa rally?

Investors in the FTSE 100 are holding out hope for a Santa rally in the second half of December as markets gear up for some Christmas cheer.

“December often delivers investors a festive treat in the form of a Santa rally,” explained Danni Hewson, AJ Bell head of financial analysis.

While the famed “Santa rally” doesn’t typically kick in until Christmas week, December is actually the best performing month of any throughout the year for the FTSE 100.

The UK stock market has returned an average of 2.5 per cent throughout the month of December over the last 40 years, according to analysis from Nutmeg.

Negative returns during the month are also much less likely, with the FTSE 100 growing in 72 per cent of Decembers over the last four decades, above second place April (67 per cent).

The trend doesn’t just hold for the UK, though: Analysis of global markets by Evelyn Partners found that December had the highest chance of any month to provide investors with positive returns, at 74 per cent.

“Market superstitions and seasonal adages are rightly viewed with a hint of scepticism,” said Ed Monk, associate director for personal investing at Fidelity International.

“That said, the ‘Santa Rally’ does seem to be the gift that keeps giving – most years at least. December 2023 brought good tidings on both sides of the Atlantic after a Grinch-like 2022.”

So why does the Santa rally happen?

What might cause a FTSE 100 Santa rally?

Explanations as to why stock markets tend to do well in December include fund managers buying more in advance of the year ahead, investing any spare cash on their books ahead of reporting periods.

Meanwhile, trading volumes around Christmas are notably thinner, which can lead to more significant market moves, while Christmas bonuses can bolster savings contributions.

“Another is that hedge funds which take negative bets on companies – known as ‘short positions’ – close out some of these positions before the year end,” added Jason Hollands, managing director at Evelyn Partners.

“This requires them to repurchase shares that they previously have borrowed off other investors in order to sell them, before returning the shares to the stock lender.

So, will there be a Santa rally this year?

Hollands noted that the markets have begun December “with some wind in their sales,” thanks to the election of Donald Trump. However, ongoing geopolitical uncertainty might dent some gains that would otherwise appear around Christmas.