Markets on track for December jump

Money management executives are hoping Santa will deliver gifts yet again this year and bring a stock market rally to round out 2017.

The so-called Santa Claus rally, when equity markets surge during the festive period, has seen December returns soar over other months in the past, data show. The FTSE 100 has been more likely to rise in December than any other month, according to a new analysis of three decades of data by money manager Schroders.

The FTSE 100 gained an average 2.4% in December over the past 30 years, the highest average gain of any month. In comparison, June has been the worst month, with the stock market index falling an average of 1%, the money manager said in a statement accompanying its data, released this month.

December has provided a stock market rise for the FTSE 100 83.3% of the time since 1987. Also on the nice list is October, with the FTSE 100 rising 74.2% of the time.

On the naughty list with June was ​ September, when the market has fallen more than it has risen, added Schroders.

And it's not just the U.K. stock market that gets a visit from Santa: Schroders found world equity markets were more likely to rise in December. Measurements across the FTSE 100, S&P 500, MSCI World and Eurostoxx 50 indexes showed a rise 79.2% of the time and an average 2.1% gain since 1987.

In the U.S., money managers and analysts expect December to bring much of the same festive spirit to stock markets. But while sources are expecting congressional Republicans to pull a tax bill out of their Christmas stocking before the end of the year, the Federal Reserve might have a surprise and potentially unwelcome gift of its own.

"It is the season of festive cheer and more often than not, stocks rally in the last weeks of December and into the new year," said David Riley, head of credit strategy at BlueBay Asset Management LLP in London. "The U.S. Congress is almost certainly going to provide shareholders with an early Christmas present by passing corporate tax cuts," setting up a rally at the end of the year across the S&P 500, global equity markets and risk assets more generally.

"But the Grinch is lurking in the background," warned Mr. Riley.

The Fed has been able to deflect the monetary policy implications of a tax stimulus for the U.S. economy that he said is already running hot. But Dec. 12-13 will see the next meeting of the Fed where tax cuts will need to be reflected in updated economic and interest rate expectations, and Mr. Riley thinks it likely another interest rate hike will be added to the three already projected for 2018. "It probably won't be enough to ruin the festive fun, but it will be a reminder that the punch bowl is being drained," he said.

Eoin Murray, London-based head of investment at Hermes Investment Management, said the central expectation appears to be for a Santa rally "with a boost likely to come if the U.S. tax bill clears its final passage through both houses of Congress in the U.S. Sectors that stand to benefit most from the reforms will drive the rally, although they could foreseeably drag everything with them."

He believes there is a 50% chance of progress before the new year, "and although the chance of a final bill being enacted has risen substantially, if it trickles over into January, Santa won't have so many presents to give out this year."

While some managers expect this December to be no different from others, stock markets in 2017 generally have been a gift to investors.​

"After such a strong year for equity performance, the need for a Santa rally seems less this year," said Neil Dwane, global strategist at Allianz Global Investors, London.

Howard Silverblatt, senior index analyst at S&P Dow Jones Indices in New York, agreed December is a "very good month historically. … Additionally, we are currently on a roll, with gains posted for eight months in a row and 13 (if) you add in dividends."

And as with the U.S., the political agenda might have a part to play regarding U.K. markets.

"This year, we may see a U.K. Santa rally if the Brexit negotiations make a turn for the good following the (European Union) meeting on Dec. 14, as the domestically focused parts of the U.K. market have seriously underperformed as concerns grew over the changes of a bad or no Brexit," said Mr. Dwane. In general, sectors that have underperformed can have a "bounce" in the rally, "though of course if indexed ETFs are used then the market as a whole will rise," he added.

Michael Spinks, London-based co-portfolio manager on the Investec Diversified Growth Fund and co-head of multiasset for Investec Asset Management, said equities have the potential to get on Santa's nice list given the supportive global economic backdrop, strong earnings and sales growth across regions and sectors, as well as the prospect of the shorter-term boost to U.S. equities should tax reforms come through.

But he said there also are reasons why equity markets might make the naughty list. "Firstly, in a strong year for equity markets, there might be the temptation for profit-taking from market participants, leading to shorter-term selling," he said. He also noted the potential for another interest rate hike decision dampening spirits as well as some geopolitical issue derailing equities, pointing to the negative market reaction after misreporting of information relating to the arrest of former U.S. National Security Adviser Michael Flynn.

Daniel Morris, London-based senior investment strategist with BNP Paribas Asset Management, said data suggest Santa's gifts may actually come a month earlier. "It appears to be the case at least since 1970 using average returns for the S&P 500 and the MSCI World index, that returns in December have been higher than in the other months. But of course, it's not quite so simple. Taking the median instead of the average of the results, it turns out that November is actually the better month. This suggests that there were a few years in which December returns were particularly strong, and that has pulled up the average value for the sample," he said.

And the actual impact of any U.S. tax reform and of European data exceeding expectations could deliver a Scrooge factor. "In the U.S., the markets appear to have already priced in much of the anticipated benefit (of tax reform)," Mr. Morris said. "If and when the legislation actually passes, the markets could be let down, as they have nothing new to anticipate. In Europe, data has been exceeding expectations, but inevitably, expectations will rise beyond the reality and disillusionment can set in even if the economy continues to expand."