The Santa Rally

Understanding the Santa Rally
The "Santa Rally" refers to the historical trend of rising stock market prices over the Christmas period. The term "Santa Rally" was first popularised by Yale Hirsch in the 1970s. He noticed that stock prices often rose during the last five trading days of the year and the first two trading days of the new year. This phenomenon, while not guaranteed, has attracted the attention of traders and investors alike. Some view the rally as a short-term indicator of market sentiment.

The Santa Rally has happened in the past for several reasons:
•    Investor optimism: The holiday season can inspire positivity for the future. This upbeat sentiment can lead to increased stock buying, driving prices higher.
•    Low trading volumes: With many professional investors on holiday, overall trading activity decreases for institutional investors. This lower volume can give everyday individual investors greater influence, which can result in rising stock prices.
•    Year-end bonuses: Extra money from holiday bonuses or gifts is often used for investments, adding funds to the market and contributing to higher stock prices during this period.
•    Self-fulfilling prophecy: As awareness of the Santa Rally grows, more investors act on the expectation of a market rise. This collective behaviour drives prices up, further reinforcing the trend.

Will the Santa rally repeat itself in 2025? Despite some evidence of this market phenomenon, it is not guaranteed and past performance is not a reliable indicator of future returns. In the chart below we show the monthly returns of the global equity index (as measured by the MSCI World) over the last five years and compare the average return from January to November with the return in December. In four out of the five previous years, the December return has been higher than the average for the rest of the year. However, in 2022 there was a significant fall in equities in December when compared to the rest of the year. This highlights that investors would be wise to exercise caution before acting upon a seasonal trend without considering their long-term strategy as well as individual goals and risk tolerances.

The Noise

• The UK economy contracted by -0.1% Month-on-Month, with a lower-than-expected GDP figure. This is the second consecutive month that UK growth has been stagnant per data from the Office for National Statistics (ONS). Many have wondered if the new labour government’s budget is to blame, but the data suggests that the UK’s economy shrank before Reeve’s announcement at the end of October. However, the Chancellor’s £25bn hike in employers’ national insurance contribution does have a part to play in this; It could still weigh on the economy by potentially driving up prices and increasing unemployment rates. Corroborating this data, market researcher GfK’s Consumer Confidence data was subdued, at a level of -17 reflecting the economic pressures the UK is facing. Markets responded to the weaker-than-expected GDP data, with the Sterling falling 0.3 % against the dollar.

• China has signalled that it will make its first monetary policy shift in 14 years, marking a significant moment in the nation’s economic strategy. The indication provided on Monday was taken seriously by investors, with markets rallying midweek. The move underscores the leadership's commitment to addressing China’s mounting economic challenges.  The Chinese economy has dealt with deflation in the past months, with recent data showing that on a month-on-month basis, prices dropped 0.6% from October to November. The main focus of the Communist party’s annual economic policy meeting will be putting measures in place to increase household spending. Chinese officials have pledged to issue more special bonds to expand the government’s budget deficit next year, and to lower interest rates. This policy adjustment also comes at a critical juncture, with the impending inauguration of U.S. President-elect Donald Trump. He has threatened high trade tariffs for China which will undoubtedly impact its economy if they are implemented. Looking forward, the shift reflects China's intent to bolster resilience against global economic uncertainties, like U.S. trade tensions to ongoing deflationary pressures.

• President Biden has allocated over $100 billion in clean technology grants through the Inflation Reduction Act (IRA) throughout his presidency in the US. These investments have supported projects in carbon capture, clean hydrogen, and renewable energy. By the end of Biden's term, over 80% of the IRA’s grant funding will go to clean tech. This is notable as the country prepares for the transition to President-elect Trump, who has openly criticized clean technology during his campaign. Trump has vowed to repeal many “green new scam” policies in the IRA. This rhetoric has already influenced markets; for example, the electric vehicle (EV) sector has faced challenges since the Republican election victory. However, many clean technology grants awarded under Biden extend beyond his term, sustaining projects through Trump’s presidency. Some see this as a strategic move by Biden to ensure clean tech continues despite anticipated policy shifts. While Trump’s opposition to clean tech is evident, it’s worth noting that during his previous presidency (2017–2021), the clean tech market more than tripled in value. This suggests market fears may be overstated, though the true impact of Trump’s policies will become clear as his second term begins in January.

The Numbers

The Nuance

Over the past 20 years, UK house prices have increased at twice the rate of household incomes, according to data released by the ONS this week. So, it comes as no surprise that the younger generations have been more reliant on inheritance and financial assistance from family members, often colloquially referred to as the 'Bank of Mum and Dad', to purchase property in the UK.

Currently, only the wealthiest 10% of households in England can purchase a house with less than five years' worth of household income. This is poignant as the ONS defines properties costing more than five years of income as “unaffordable.” By this standard, the last time the housing market was 'affordable' was in 2001, with London considered unaffordable by these standards for every income bracket.

Recent economic data suggests that this trend in rising house prices is continuing, as in November, UK house prices jumped up by 3.7%, above expectations. This is up 1.2% month-on-month and is the sharpest rate of house price growth in two years. Corroborating this, the RICS UK Residential Market Survey's house price balance, which tracks the difference between the percentage of respondents reporting price increases versus those seeing declines, jumped to +25% in November 2024, meaning almost all parts of the UK are seeing an upturn in house prices.

Further, following UK Chancellor Rachel Reeves’ October 30 Budget announcement, there will be a rise in stamp duty in March, prompting increased housing market activity. From April 2025, first-time buyers will face stamp duty on properties worth £300,000 and over, down from the current £425,000 threshold. This policy shift is expected to incentivise buyers to expedite purchases, potentially boosting sales in the short term but raising concerns about affordability pressures for future buyers.

Looking ahead, it’s important to note that the Labour government has pledged to ‘get Britain building again.’ Seemingly, there is hope that prices will not soar as much as they have previously with 1.5 million new homes promised to be built in the coming years. By increasing the supply of homes, the policy aims to reduce the mismatch between demand and availability, which has been a key driver of escalating house prices. Greater supply could temper the competition among buyers, easing upward pressure on prices.

Nevertheless, the UK housing market faces ongoing affordability challenges, as it has for the past two decades, with price increases outpacing household income growth. Until substantial changes are made, unfortunately the dream of homeownership will remain stretched for many in the UK.
 

The Niche
A fun financial markets fact of the week

This week we wish a very Happy Birthday to bonds, which turn 400! They first launched on the ‘Hoogheemraadschap’ - a Dutch local water authority and the first fixed income market. The world’s oldest living bond from this market is still issued and collects c.£300 of interest each year that has been in effect since December 10, 1624. The water board promised Elsken Jorisdochter, her descendants, or anyone who owned the bearer bond, 2.5% interest in perpetuity. Through the centuries, bonds have evolved from humble waterworks financing to a cornerstone of modern portfolios, balancing both risk and return.