12 Dec 2022
With Christmas looming, most of us are looking back at the last 12 months with a strong sense of ‘good riddance’. Let’s face it – it’s been a challenging year that’s reminded us just how volatile life and markets can be. This year has presented us with a set of extraordinary challenges in the form of war on the European mainland, post-pandemic supply chain disruption, soaring energy prices, rising inflation and interest rates and in the UK, political turmoil, and industrial action. Surely, 2023 won’t be quite so turbulent?
Many of us are looking forward to the Christmas period, to switching off and focussing on family and friends, but before we get to that, there’s a whole load of planning and purchasing to be done. It’s a time of year when we go all out to treat our loved ones and we’re likely to spend more in December than at any other time of the year, but British consumers continue to grapple with the cost-of-living crisis. This will no doubt impact on consumer spending this year, with many having to tighten their belts and some families struggling to even keep warm, let alone afford Christmas.
Inflation continues to hit household budgets and the Financial Times is reporting that the average cost of a Christmas dinner in the UK is going to rise by nearly 10% compared to last December. The average price of a turkey dinner for 4 is around £31 according to research by Kantar, 9.3% higher than in 2021. Potatoes are up 20% and parsnips by an epic 30%. UK grocery price inflation did fall in November but remains close to a 14-year high. Based on current costs, a family of 4 will have to spend an additional £60 in December just to buy the same items as they did last year. The only saving grace when it comes to food price inflation is that, according to Capital Economics, we are now likely to be close to the peak.
What happens to stock markets over the festive period? A Santa Claus rally is a calendar effect that involves a rise in stock prices during the last 5 trading days in December and the first 2 trading days in January. Over the 7 days, stock prices have historically risen 76% of the time, far more than the average performance over that period. Looking at the FTSE 100, we can see that shares have risen in the final month of the year in 25 out of the last 30 years.
China, which has been one of the worst performing stock markets of 2022, has recently staged a strong recovery, which is in part is due to the easing of some Covid-19 restrictions. The US has also seen some renewed interest since the Fed hinted that the period of 0.75% rate hikes is going to end and investors are looking forward to some return to normality generally in the coming year. Shares have been on the up for the last couple of months and if this movement continues into December, it will be the 4th consecutive year that shares have risen in the run up to Christmas.
With all the challenges faced over 2022 and the stormy backdrop, will this year continue to follow the norm, or will it buck the trend? And is the market rally too much too soon when there’s still the possibility of recession on both sides of the Atlantic? Stock market anomalies occur at different times of the year and can inform the strategies traders and investors employ. Santa rallies that have generated the largest returns have taken place after a stock market crash. The Santa rally phenomenon clearly does occur regularly, but it has no definite cause making it difficult to predict. Regardless of whether you decide to trade the seasonal rally or not, it’s prudent to understand market movement so you can manage risk.
The release of November’s US inflation will inform markets and will shape how markets behave going into the Christmas period. The Fed is expected to slow the pace of tightening to a 0.5 percentage point increase which, if it comes to fruition, could generate market positivity. Yet Morgan Stanley believes that the recent outperformance by stocks in Europe is looking overdone, suggesting that there is a downside risk. Messages are mixed and due to the uncertainty over interest rate rises and the value of stocks, there’s a question mark over whether the Santa rally will materialise at all.
What’s in it for investors when it comes to a potential Santa rally? A Santa stock rally could cheer investors after a prolonged bear market in 2022 but trying to time the market to generate returns may not prove lucrative and could be a fools’ game. A successful investment strategy doesn’t necessarily focus on one month of the year and with many fund managers cautiously optimistic for 2023 and beyond, portfolios with a medium to longer-term approach are positioned to benefit from a brighter and less choppy year in 2023.
Jon Lycett, Key Accounts Manager
Katie Poulson, Client Engagement & Marketing Manager
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