Uncertainty, political upsets and geopolitical tensions dominated markets again in 2024. For its part, the FTSE 100 remained reasonably resilient, hitting a record high in May, and the index approaches the end of the year up 7.95% overall. The broader Morningstar UK index is nearly 12% higher in the year to date.
This is some way behind other key markets, with the S&P 500 up 28.41% so far in 2024.
Could the “Santa Rally” already have begun? The Morningstar UK index and FTSE 100 are up around 3% over the month. Historical performance suggests December is a good time for investors.
Why the Santa Rally is Real
UK stocks typically rise in the lead up to Christmas and the New Year, as this chart over the last five years presents.
This “Santa Rally” is attributed to limited trading hours around the Christmas holidays, which results in a lower volume of trades. That means it’s theoretically easier for the market to move higher on lower liquidity. Other explanations for the phenomenon include workers investing their holiday bonuses and a general feeling of seasonal optimism.
eToro analyst Sam North says the UK has been one of the best hunting grounds for Santa Rally investors over the decades.
“Since [the FTSE 100’s] formation in 1984, December has outperformed other months by 1.93 percentage points, returning an average 2.29% and accounting for 36% of its yearly performance,” he says.
“Japan’s premier index, the Nikkei 225, is not far behind, with December delivering outsized gains of 1.98%, outperforming monthly returns from January to November (0.39%) by 1.59 percentage points, while accounting for 32% of annual performance.”
The UK’s FTSE 250 index also appears to perform particularly well in the lead up to Christmas. It has returned an average of 2.71% in December, 2.19 percentage points higher than the average across January to November.
Are There Risks to Investing in December?
Success isn’t guaranteed, however.
“Investors might believe that Christmas has come early this year, with markets generating significant returns through November after Donald Trump’s election and a strong earnings season in the US,” says Pacome Breton, head of portfolio management at the digital wealth management platform Nutmeg.
“While the Santa Rally has been an attractive theory for investors to believe in over the last few years, and there is some logic to this belief, it is clear from the data that market performance in December can be volatile.
“December could be quieter across markets as investors take a deeper look at what 2025 could bring for central banks, geopolitics and the future of the world’s largest economy. With such a strong narrative around this seasonal phenomenon, it can be tempting to time the market and expect returns to materialize.
“Looking at past performance, a Santa Rally is by no means guaranteed nor delivered equally. In 2018, developed markets fell as investors became uneasy about low growth and a potential US-China trade war. Only by ensuring your portfolio is diversified globally can you benefit from a Santa Rally where it appears.”
Which UK Stocks Are Gearing Up for the Santa Rally?
James Lowen, co-portfolio manager of the Morningstar Silver-rated JO Hambro UK Equity Income fund, says it is challenging to predict how the UK equity market will perform this December. But there are tailwinds.
“M&A activity is off the clocks. I have seen six bids in this fund year to date out of 60 stocks [we hold]. We are getting very strong corporate reporting and that’s driving share price performance,” he says.
“We have also got an acceleration in dividend growth. Rates are being cut around the world which is very helpful and [we are seeing] flows return to the UK market.”
Lowen believes that three stocks—Marks & Spencer MKS in the FTSE 100, and Wickes Group WIX and DFS Furniture DFS in the FTSE All-Share—could end the year on a high. All benefit from Christmas spending, but each also has a positive future in the medium term.
“About three weeks ago Homebase went into administration and that has two impacts on Wickes,” he explains.
“First, one of its main competitors is [leaving], so it will have a revenue uplift. And secondly the management team at Wickes will focus on picking up some stores that Homebase was in.”
Lowen is also bullish on DFS due to its 40% share in the UK sofa sales market, which it hopes to grow through the current struggles of SCS.
He also points to M&S gaining market share on food at price points that are competitive with normally cheaper rivals Sainsbury’s SBRY and Tesco TSCO. Year to date, M&S shares are up 42.88% after a strong 2023.
How Should UK Investors Prepare for Festive Trading?
People already invested in global trackers will benefit from a diversified portfolio, which will bake in areas of strong performance from countries where they occur.
For those thinking of investing, the Santa Rally on its own should not be the motivation. Past performance is not a guide to future performance, and there are unique factors that mean an investment 12 months apart in the same market will vary dramatically in nature and outcome.
If you think you would benefit from a professional take on how to manage your money, book in with a regulated financial advisor. You can confirm that the business you’re dealing with is authorized by the Financial Conduct Authority by using the FCA’s own register here.
In addition, look out for scams this Christmas.
The festive period can be an emotional time, so that makes savers and investors vulnerable to the wiles of fraudsters. Don’t be afraid to take time out to think, get help if you need it and remember: if it sounds too good to be true it probably is.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
