Santa arrives too early for the City

Seasonal goodwill is said to boosts markets, but this year's peak is premature. Laura Chesters reports

Traders in the City look forward every year to a special Christmas gift – not something they can find under their tree on Christmas Day. It is the rise of the stock market in the run up to Christmas.

The so-called Santa Rally theory is backed up by the statistics. Since 2000, the average return for the UK equity market in December has been just below 2 per cent, second only to April's average return of 2.1 per cent.

The FTSE 100 last hit 6,000 in July last year and on Friday, news that the politicians in the US were still some way from achieving a solution to the fiscal cliff sent the index down 18.35 points to 5939.99 – quite a way off the hoped for 6,000 mark. Tomorrow is a half day of trading and with four sessions to go until the end of the year, some still think the benchmark index can edge toward the 6,000 mark again.

But is it really Christmas cheer that peps it up each year? Peter Hafez of the news analysis and software group RavenPack reckons it is the good news in November that helps the market up in December, not Christmas goodwill.

But the good economic news in November – including President Obama's re-election, better economic data from the US and some progress on the debt problems in the eurozone – might have actually brought the Santa Rally too early this year.

Mike van Dulken, the head of research at Accendo Markets, says: "The more people believe in the much touted theory, the more they will try to position themselves early. While the market bounced strongly this year from mid-November, helped by QE4 expectations, this also means the rally began to already run its course by the time it moved into the festive month."

But even if you know and expect the Santa Rally to come around each year – when is the good time to invest, and to sell?

Neal Gilbert from market maker GFT Markets says the time to buy could have been mid-December. He says: "If you bought the FTSE 100 at the closing price on December 15 then sold again at the closing price on January 5 – on 11 of the past 12 years, the FTSE rose during this period, giving an average gain of 2.63 per cent. The only year that saw a drop – a modest 0.64 per cent – was Christmas 2006."

So if you invested wisely you could be up more than 2 per cent when you sell in the new year. But what if you weren't so quick to pile in earlier this month? It might not be too late, according to Mike McCudden, at Interactive Investor, who argues the Santa Rally is about as real as Santa himself.

He says: "Generally, we do have a festive pop in equities at this time of year but I don't think Santa has much to do with it.

"I believe this is just one small part of a longer bi-annual cycle which will see us through to May next year … when everyone sells and goes away."