Market Update 9th December 2024

Mommy – is Santa real?

We may only just have opened day number nine on the advent calendar, but so far, December has been sweet. Powered by around $140bn of money pouring into equity markets after Donald Trump’s victory in the Presidential election, markets look set to end the year on a high.

This is before the Santa Rally, which is the rather strange phenomenon of the market rallying around Christmas. Regardless of whether there is any truth in it, it has gained increasing traction in recent years. And the data is sympathetic according to monthly returns from the last 50 years (which is approximately when the term was first coined).

Over that timeframe, December has been a particularly strong month in both the UK and US markets. MSCI data have the UK market rising in 39 out of 50 years, and on 36 occasions in the US. That’s a strike rate of 78% and 72%, which beats the long-term average probability of any one month delivering positive returns, which hovers around 62% in both markets.

The presence of a numerical connection doesn’t mean much though. It needs to be stitched together with logic. For practical examples of this, I would thoroughly recommend browsing through any of the internet’s good spurious correlation websites, which link two unconnected variables over various timeframes.

Phenomena around baby names feature heavily. For instance, there has been a near 100% overlap between the number of newborns given the first name Stevie and the return on Netflix shares.  There are many excellent astrological ones too. The distance between Saturn and the Sun has been correlated with customer satisfaction at HP. Without wishing to offend any horoscope-sympathising readers, there is clearly no sensible explanation for this.  Perhaps my favourite is in the middle of the bizarre interplanetary–baby name Venn diagram. It is also terrifically apt. The popularity of the first name Sunny has moved accurately with solar power generation in Egypt.

As you can probably tell, I am very entertained by these. I mean, the fact the number of web searches for ‘zombies’ moving in step with the number of real estate agents in North Dakota is just excellent stuff. But it’s funny because it is clearly nonsense.

Which brings us back to the Santa rally. Is there anything to it? Or is it just something for a columnist short of material to write about?

It looks like what has happened following this year’s election is not that uncommon. In the US, positive December returns in election years are even more likely than non-election year Decembers, and the average upside is marginally higher too. That’s been the case in the UK too (these days our large caps actually generate more revenue from the US than anywhere else, including the UK). Better December election years tell us that a portion of the Santa Rally effect is maybe down to a recurring relief rally as the unwinding of uncertainty around an election outcome dissipates. But this doesn’t explain everything, and we wouldn’t be betting on that every election.

Other potential factors include the perky mood of investors around the festive period, and the theory that December can see relatively more active (and bullish) retail investors, who are often armed with annual bonuses. We’re certainly not wanting to be disgruntled about anything that pushes markets higher – but we can’t help but think none of these carry much explanatory power. Perhaps the biggest contributing factor is the story itself.

But anyway, the prospects for longer-term returns from the equity market depend on two things. Valuation, and the underlying health of the businesses invested in. They are not unrelated. When a business is thriving, its rating tends to appreciate. This is what has happened in the US over recent times. Stocks have become relatively more expensive on the back of outstanding profit growth. With the tech sector helping to power expectations for double digit percentage earnings growth in 2025 and 2026, this increase in profitability will hopefully continue. Whether it will is the question. Although we should be careful not to assume too much, there is no reason to expect a slowdown is imminent. Third quarter results saw 75% of companies exceed profit expectations.

This certainly represents a strong position from which to enter 2025. Let’s hope this positivity can continue.

George Salmon – Senior Research Analyst

Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk) with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of George Salmon. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments.