Santa Claus is coming to trade.

It may only be early November, but already some traders are preparing for the annual ‘Santa Rally’ –a 4-6-week period in which stock markets have a statistical tendency to trend higher into year end.

Over the past 21 years, global indices – including the UK’s blue-chip UK 100 index – have enjoyed the beneficial market conditions, with the latter trading higher on 18 occasions in the past 25 years.

This report will reveal more facts and figures about the Santa Rally, including the best stocks to trade and their potential returns, based on historical data.

What is a Santa Rally & why does it occur?

The ‘Santa Rally’ is the period leading up to Christmas and the New Year in which stocks tend to rally. This peculiar phenomenon has been identified as a regular occurrence over the decades, taking place on numerous occasions, including in 2016.

Whilst there is no guarantee that the stock market will rally in the run up to Christmas, there are several theories that can explain the conditions that cause equities to rally during these final weeks of the year.

• Fund managers cut underperforming stocks while bolstering positions in top-performing stocks to improve year-end return figures to show next year’s prospective clients.
• This ‘window-dressing’, alongside reduced trading volumes as traders go on holiday, lends itself to the hoarding of the best stocks, leading to greater than average share price movements over the period.

Will 2017 be another up year?

This year, the UK 100 has underperformed peers year-to-date (YTD). However, in 18 of the past 25 years, the UK’s blue-chip index has rallied on average 2.4% in the final eight weeks of the year. Could 2017 see the 19th rally to help the UK Index play catch up?

The underperformance has come amid a tricky 2017 for UK equities. The triggering of Article 50 in March began the 2-year Brexit process and, so far, things haven’t been going as quite as promised. An unwillingness to compromise has left both teams at an impasse, although both the UK and EU remain optimistic a deal can be reached.

Similarly, central banks have been a key driver of sentiment in 2017, however the Bank of England has been slower on the hawkish uptake than the Fed or ECB. Following its first interest rate hike in 10 years, is the BoE finally riding the wave as the others?

How could this underperformance be reversed?

London Stock Exchange data shows 34% of UK 100 companies are currently trading lower than at the start of the year, on average trading -11.3% YTD.

However, almost half of these companies are trading offside by less than 10%, whilst two thirds rallied from 5 Nov – 31 Dec in 2016.  Might these companies repeat their 2016 performances to boost the UK Index ?

In the lead-up to the new year, having a dedicated research service can mean the difference between a happy, profitable Christmas or a disappointing one.

Accendo Markets’ research team puts together daily publications on indices, commodities and blue-chip equities. To discover our award-winning offering, sign up to have it delivered directly to your inbox.

There are no guarantees, but statistics are supportive

As the saying goes, ‘there’s no smoke without fire’, and this certainly applies to the Santa Rally phenomenon.

The table below – showcasing the yearly performances over the past 10 years and averages based on available data since 1992 – show the UK 100 has rallied in the eight weeks studied 18 times in the past quarter century.

Source: AlphaTerminal; 2017 Year To Date (YTD) calculated intraday 1 Nov 2017

The best UK 100 performance, a 10.8% rally, came in 1993 and is, to date, the only double-digit performance. However, a further seven rallies of over 5% have taken place in 1992, 1995, 1996, 1998, 1999, 2009 and 2016.

Conversely, the worst 8-week performance came in 2002, when the UK Index fell by 5%. This easily underperforms other negative years, with the UK Index falling by more than 2% on only two further occasions – 2000 and 2008.

But this phenomenon isn’t just limited to the UK 100 .

Stock market indices across the globe are prone to rally in the final 8 weeks of the year. On the next page, we analyse the performances of an array of global indices into the holiday period.

Major indices Performance

The table above shows the performance of a selection of global indices from 5 November until 31 December, based on available data since 1995. The figures show that – excluding Australia’s ASX – these indices have rallied on at least 12 occasions in the past 22 years by an average of 2.6%. The ASX, a younger index, remains plagued by 2008’s 14.2% decline. Excluding that year, the Australian market has risen on average by 1.7%. After a disappointing 2015, all enjoyed a Santa Rally in 2016. Will 2017 see stock markets enjoy another happy ending?

Continuing the theme of years that have seen Santa Rallies, the table below denotes the 15 UK 100 companies that have seen their share price increase on the most occasions during the 8-week period to the end of the year.

Best UK 100 Performers (no. of years up)

The most striking takeaway from this table – calculated using data available since 1994 – is that the rank outperformer, CRH, is the only UK 100 company to have rallied on 20 separate occasions. The company has also enjoyed the best average performance of the 15 UK 100 companies on the list, climbing 9.3% on average.

Other companies of note include WPP, the only stock to have rallied in every year of the past decade, while Ashtead enjoyed an astonishing 29.8% rally in 2016, the largest gain by any UK 100 company, winning out over Prudential (+24.8%), Ferguson (formerly Wolseley; +19.8%) and Berkeley Group (+19.7%). Alongside WPP, Tesco is the only other company to trade negatively YTD, while Experian joins CRH with less than 1% growth.

Over the page, we’ll delve deeper into the Santa Rally trends of UK 100 companies in the past 23 years.

Best UK 100 Performers (Average % gain)

The table above shows the top 15 performing UK 100 companies by average percentage gains during the Santa Rally period – 5 November to 31 December. Micro Focus, the only company to enjoy a double figure average, is the clear outperformer, while CRH, the only company to log 20 positive years of growth, can also be seen near the top. Three companies that are negative YTD – Merlin Entertainments, ITV and Paddy Power – also feature.

The table below, on the other hand, denotes the worst UK 100 performers from 5 November through until the 31 December by percentage loss, based upon the available data for each company from the past 22 years.

Worst UK 100 Performers (Average % loss)

What immediately jumps out from this list of names is the prominence of relatively new London-listed companies on the UK 100 . Names such as Convatec and Mediclinic International may not be as familiar to traders as some of the best performers, however a strong 2017 could see average performance figures improve.

For the full breakdown of these figures, or to discuss options with one of our traders, please contact [email protected] and we will call you back with the information requested.

Want to take advantage of the above opportunities right now?

Whether you see UK Stocks going up or down for the remainder of the year, tradable opportunities will present themselves regularly. We’re here to help you weed them out and capitalise on them. Accendo Markets can help you increase your profit potential with the use of leveraged instruments such as CFDs, a flexible alternative to traditional shares that is currently exempt from UK stamp duty.

CFDs: Like shares, but more flexible

The example above shows how buying 1,450 shares in British Land @ £6.90 requires an outlay of around £10,000 plus commission (see left-hand box), while the same exposure via a CFD requires about £500 plus commission (see right-hand box). If a trader invests in British Land, one would assume they believe the share price is likely to move in their favour. After considering the ‘worst case scenario’ and assigning funds to cover it, the trader may conclude there’s little point in exposing the full £10,000 to the BLND shares - some of that capital could be put to good use elsewhere in the markets. (Source: IG, Prices indicative)

CFDs are leveraged instruments, but you don’t have to use the leverage

If you had, say, £10,000 to invest in the stock market, you could deposit that amount into a share dealing account and purchase shares in a company. You would pay commission to open the position, 0.5% in stamp duty and the full £10,000 will be tied up in your chosen shares with any profit or loss based on that exposure. The same £10,000 worth of exposure can be secured with a CFD for a fraction of the initial outlay thanks to leverage, with the risk and reward the same as if £10,000 worth of traditional shares were held. But should you not be interested in leverage, you can always treat CFDs like shares. Simply deposit £10,000 into a CFD trading account and take the equivalent CFD position which will tie up just £500 (note that overnight financing costs will still apply). The remaining £9,500 is not tied up, so you can use some of that to take advantage of another short-term opportunity elsewhere, or simply leave it on the account to support any losses. Best of all, using a CFD means you pay no stamp duty!

What’s your view?

Think shares will rise? Take a long position by buying CFDs (buy low, aiming to sell high). Think they’ll fall? Take a short position by selling CFDs (sell high, aiming to buy low). For a more detailed rundown of CFDs, their mechanics, associated costs and some trading scenarios download our ‘Comprehensive Guide to CFDs’ here.

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