At the tail end of November – which is when I am writing this – markets appeared to have become stuck in something of a rut.
The FTSE 100 index is having trouble breaking above 6,700, a figure breached earlier this year. The US market is making a better fist of things, but even there things have become remarkably subdued of late. Can we rely on a late rally to deliver a seriously positive return for the year?
According to research that came across my desk last week, there is an 80 per cent chance of the S&P 500 rising during the month of December – the so-called Santa rally. The average gain is, apparently, 2.3 per cent, which translates into a 40+ points rise this year. Why shares should be so buoyant during the festive season is less easy to determine, but year-end window dressing is probably more of an influence than euphoria driven by Christmas parties.
Actually, shares in general are more likely to rise than to fall over any given year. One of my favourite charts, used in all of the presentations I make on the virtues of equity investing, demonstrates that in the 47 years since the FTSE (previously FT Actuaries) All Share index has been around it has seen negative returns on a year-by-year basis, in only 12 years.
OK, I admit this is calculated on a total return basis but surely dividends are half the reason investors choose equities anyway.
This means that you are nearly 75 per cent certain to receive a plus result on equities. Interestingly, this research I perused last week came up with an even more encouraging figure. Since 1897 (and who can forget these early beginnings) the US stock market has risen by 20 per cent or more for one year in three.
By the end of last week, the S&P 500 was up by 26 per cent on the year, so clearly we were looking at a one in three experience, with any Santa rally simply adding to investors’ joy and failing to distort the statistics.
Could anything emerge to upset expectations? Of course, the unexpected always lurks to catch out the unwary, but known influences are unlikely to unsettle sentiment.
Even the Autumn Statement should confirm the economic corner has been turned. The decision of the Bank of England to scale back the Funding for Lending scheme demonstrates growing confidence, though the Nationwide’s house price survey last week showed how upward pressure on prices was growing. The average increase at the end of November was 6.5 per cent, up from 5.8 per cent the previous month.
Back to the US, where last week Black Friday took place. This expression has travelled across the Atlantic, with many retailers advertising “Black Friday Sales”. I confess to having been unfamiliar with the term, which refers to the day after Thanksgiving Day, a public holiday in the US. Apparently, this is the day when shoppers start preparing for Christmas in earnest, with a buying binge across the nation.
Black Friday sounds sinister to me and is redolent of Black Monday, the day of the great crash in 1987, or Black Wednesday, when Britain came out of the European Exchange Rate Mechanism.
Quite why it is called Black Friday is unclear. The two versions I have heard are widely different. One suggests it was coined by police in Philadelphia, who found the traffic on the day after Thanksgiving atrocious. An alternative explanation is that it is the day retailers move into the black as shopping steps up ahead of Christmas.
Whichever version is correct, assuming one of them is, the strength of retail demand this year will give as good an indication as any of the nature of the economic recovery. All in all, 2013 looks to have been kind to investors. A Santa rally will be the icing on the Christmas cake.
Brian Tora is an associate with investment managers JM Finn & Co