Metis AM
Over the festive season and into the new year, you might notice share prices fluctuate.
Two common stock market trends usually cause values to rise over this period: the “Santa Claus Rally” and the “January Effect”.
By understanding what these trends are and how they might impact your investments, you can prepare for volatility and avoid knee-jerk reactions as values rise and fall.
Read on to find out what the Santa Claus Rally and January Effect could mean for your investments, and why it’s often worth staying the course through periods of volatility.
The Santa Claus Rally could cause share prices to rise
In the last five trading days of December, through to the first two trading days of January, stock markets tend to rise. This is known as the Santa Claus Rally.
During this period, the S&P 500 has been positive 79% of the time over the past 75 years, gaining an average of 1.3%, as Investopedia reports.
A variety of factors may contribute to this trend, including:
- Increased spending during the festive season
- Optimistic spirit and goodwill around the holidays
- End-of-year financial considerations, such as Christmas bonuses
- Fund managers rebalancing portfolios before year-end
- Investors buying shares in anticipation of January gains
- Reduced institutional trading due to annual leave.
Often, the Santa Claus Rally gives share prices an extra boost at the end of December, a typically strong month. In December, IG reports that, between 1985 and 2015, the FTSE 100 saw average gains of 2.26% and rose in value 83% of the time.
In fact, while the Santa Claus Rally is typically defined as the last few days of December, IG analysis suggests the FTSE 100 often sees the biggest rises from 14 to 16 December.
As a result, some investors might opt to buy shares if values rise.
However, it’s worth noting that this isn’t always the case. On some occasions, the end of December has seen share prices fall as part of a broader market downturn.
Values could increase due to the January Effect
The January Effect is the theory that the stock market receives a boost at the start of the year.
It was first defined in the 1940s, when an investment banker suggested that US share prices saw a bigger increase in January than in any other month.
The effect is generally believed to be greater for small-cap companies. In the UK, small-cap companies are often defined as businesses with a market capitalisation between £100 million and £500 million. Such companies are typically too small to be included in the FTSE 350 index and may be more susceptible to volatility than larger companies.
While there is some debate as to whether the January Effect really has an impact on share prices, Schroders reports that January was a positive month for UK markets in 71% of 130 Januaries examined. On average, UK returns have been 1% higher in January than in other months since 1980.
This phenomenon could be driven by a range of factors, such as:
- Investors re-entering the market after the holidays
- Christmas bonuses and gifts being invested
- New year positivity leading to increased investments
- Financial goal setting for the year, resulting in new investments.
That said, it’s important to remember that historical trends are not a guarantee of future performance. It may not be wise to base your investment strategy on the expectation of share prices rising in December and January.
Treat the “January Barometer” with caution
Some believe that January performance is an indicator of how markets will trend through the rest of the year. Known as the “January Barometer”, this concept is an interpretation of the January Effect.
Suggesting that the year will see stock markets move in the same direction as in January, the January Barometer is sometimes viewed as a guide to investing for the subsequent 11 months.
However, this theory should be treated with caution. As demonstrated, January often sees positive gains for the markets, while share prices typically trend upwards over time. So, correlation doesn’t necessarily mean causation, and it may be unwise to base your investment plans on January’s performance alone.
Prepare to stay the course through volatility
When share prices rise, it’s easy to get excited.
It’s important to remember that both the Santa Claus Rally and the January Effect are typically temporary trends. Stock market performance often fluctuates throughout the year, depending on both seasonal trends and various other influences.
So, it could therefore be wise to prepare for your investment growth to slow as the effects of the new year wear off.
Over the long term, share prices have historically trended upwards. As the saying goes, “time in the market beats timing the market”. As a result, it’s often worth staying the course with your investments, rather than rushing to sell in the excitement of gains.
By creating a comprehensive investment plan, you can help avoid making impulsive decisions amid stock market volatility. Whether you’re prone to a knee-jerk reaction of cutting your losses during a downswing or cashing in when prices rise, having a clear investment strategy could help maximise your long-term gains.
Get in touch
As we head into the new year, our financial planners can help you define an investment strategy and portfolio that suits your needs. Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.