At year-end, you may have heard the term ‘year-end rally’ or the ‘Santa Claus rally’. If you’ve ever wondered what this refers to, it is quite simply the often-repeated trend of a marked increase in equity prices in the month of December. In some ways, it is the opposite of the injunction to ‘sell in May and go away’.
How did this saying arise and is there any truth in it – especially for us in South Africa?
There is generally a spirit of good cheer going around in December. Many companies pay Christmas bonuses or year-end bonuses, meaning more people have some extra money to spend or invest. In addition, you will find any number of people and organisations writing about the outlook for the next year and there is generally not much appetite, apart from the usual ‘doom and gloom’ brigade speaking of a dismal outlook, so it makes sense to tell the people what they want to hear – inadvertently encouraging them to buy.
Many fund managers’ performance is judged on the calendar year. Never mind that the stock exchange closes early on the last trading day of the year with a general celebratory mood and few sellers, despite that almost all the larger fund managers will have taken at least Christmas to New Year as leave. Having said this, it makes sense for career-risk averse fund managers to buy some of that year’s winners (and sell some of the losers) to be able to report having chosen well and positioned the portfolio well during the year.
This is assisted to a large degree by the fact that in the United States, the tax year runs from January to December and so it makes sense to sell the losers for a capital gain tax credit.
But is it true?
Let’s look at the monthly returns over the past 19 years and see whether they indicate that December is usually a ‘good’ month.
In a study of the monthly returns of the FTSE/JSE Overall index from December 1996 to November 2016, the total returns for each month were:
And there it is. The best month, on average, is December. But the real surprise is that the second-best month is October. Who knew that? Interestingly, the best December return was 12.8% (in 1999) and the worst was 4.4% in 2007.
Interestingly, the data also show that another old saw, ‘sell in May and go away’ also holds true – just look at the returns for June, July, August and September.
So – go ahead. There really is a Santa Claus rally! Stocking up ahead of that has an excellent reward/risk ratio.
Liston Meintjes is head of investments at Sasfin Asset Management.
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