Treat yourself to a festive spending spree

Christmas traditionally brings seasonal stock market cheer - and this one should prove to be no exception, so if you have money to invest, then the time to do it is now
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The Independent Online

Just five weeks to go before the end of the year and still the FTSE 100 Index is well shy of its opening level at the start of the year. What chances are there of a year-end surge? History tells us the possibility is most certainly there, although whether it can take this market into new high ground is another matter.

Just five weeks to go before the end of the year and still the FTSE 100 Index is well shy of its opening level at the start of the year. What chances are there of a year-end surge? History tells us the possibility is most certainly there, although whether it can take this market into new high ground is another matter.

December is traditionally a good month for stock market performance. During the 1990s, the market closed higher on no less than eight occasions during the month, the average rise being a very useful 2 per cent, even allowing for the down years. Exclude 1991 and 1994 - the down years - and performance improves to nearly 3 per cent - not a bad average for a single month. Yet December is not a month for much hard news. There are usually no opinion-forming government statements - and it tends to be a dead period for company reporting. Why, then, should Christmas bring with it stock market cheer as well as the prospect of feasts and presents?

As in so many things, you need to look across the Atlantic to find the reason for the buying interest. While some of the reasons for higher prices exist in this country, it is in the USA where fund managers tend to be pushing stocks higher at a time when there is often a paucity of sellers. This in turn translates into greater optimism in other world markets. Never underestimate the power of the Yanks. They are the richest nation in the world, after all.

The starting point is the calendar year-end. Many institutional investment funds such as pension funds and insurance companies operate to 31 December on an accounting basis, so fund managers are busy balancing the books during the weeks to the year-end. The managers will be aware that trustees and other interested parties will cast a critical eye over share portfolios once the festive season is over. They will seek to ensure the year-end valuations will reflect well on the skills of the manager. Often that means not having too much cash in the balance sheet. Certainly, portfolio housekeeping will entail dumping the dogs and ensuring current fashion is well represented.

Then there is the 401k American personal pension plan that has been credited with fuelling the US bull market that only really ran out of steam this year. Contributions into 401k pension plans take place in January, but fund managers expect a flood of cash and can start to build their books in anticipation of the new receipts. Whereas PEP and ISA money has traditionally gone in towards the end of the tax year, in the USA they seem to get their act together rather faster. There is a moral for us all, I feel.

So, a combination of generally quiet markets, cash flowing into investment funds and the need to carry out a critical review of the portfolios you are running, generally leads to more institutional buying as the year draws to a close. In the USA, the rally often continues into the New Year, but the message to investors is clear. If you have money you wish to invest like taking out this year's ISA, for example, then the time to do it is now, not wait until the last minute.

Whether this year will generate a similar pattern is more difficult to guess. However, one thing is for sure. The technical factors support a year-end rally. I only hope the Americans will not deny us the opportunity to recover ground lost during the current year.

Uncertainty, such as that which the electoral impasse has created, is unlikely to help. In the end, though, the rally is more likely to be delayed than denied.

Brian Tora is Chairman of the Greig Middleton Asset Allocation Committee

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