December is typically a bullish month for stocks. However, no international stock index has performed quite so well during the month than the FTSE. For the last ten years in a row the FTSE has posted positive gains in December. Other stock indexes have performed well in December, including the Nikkei and the DAX which have both shown gains in nine out of the past ten years. But the FTSE is the only index to go ten for ten. Here we will look at why December is so good for stocks on the FTSE and whether this year the pattern is likely to repeat itself.
The Science Behind The “Santa Rally”
The rise in stocks during December has been so consistent that it has earned itself the name the “Santa Rally”, but why do stocks rise during this month? Of course the exact reasons may vary from year to year but there are some commonalities that indicate why this is such a good month for stocks.
Firstly trading volumes are the lowest for the entire year during December. That means that any money does flow into the market can have a larger than normal effect. Secondly people usually use December to re-organize their portfolio for the year to come. Profits are taken and usually reinvested in the market. December is also the month when people receive their end of year bonuses. Some of the money might be spent on Christmas presents for the kids, but a good portion of it gets invested into the stock market.
Can We Expect the “Santa Rally” To Arrive This Year
All indications are good that the FTSE will rise again this month. There are a couple of risks that could lead to a bearish December but these seem likely to upset the FTSE’s ten year run. The biggest risk is an interest rate rise in December which could turn investors away from the market. However there is no expectation for such a rise in the UK in the short term. The European Central Bank has also indicated that they are more likely to cut interest rates than push them higher for the immediate future. Overall it looks like December might be a very good opportunity to pick up a little extra cash for Christmas.
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