The well-worn investing aphorism "sell in May and go away" is founded in the frequently volatile performance of the sharemarket in May. Investors may also be familiar with the so-called "Santa rally" phenomenon based on the frequent outperformance of the market in the lead-up to and during the festive season.
Official figures paint a compelling picture of the sharemarket's performance over the holidays, with the Santa Claus-effect first documented in 1972. Figures show that since 1950, December has been the best performing month for the market, with the All Ordinaries index rising 74 per cent of the time. Over the period, the index has delivered average gains of 2.1 per cent over the month.
As the new year approaches, the market tends to perform particularly well. Bell Potter's Richard "Coppo" Coppleson describes the market hitting a "sweet spot" from mid-December through to early January. His research shows that during this period, Australian shares have posted gains in 31 out of the past 37 years to deliver an average return of 3 per cent. In the 31 "up" years since 1980, the market has increased an average of 4.2 per cent. Further, a remarkable 25 per cent of the time the market has surged by 6 per cent or more.
Since 1995, the All Ordinaries has fallen just twice during this trading period – once in 2007-08 (down 6.3 per cent) and again in 2010-11 (down 0.7 per cent). Analysis by Andrew McCauley of Veritas Securities finds that the market delivers inordinately high returns in the eight trading days before New Year's Eve, with the All Ordinaries rising a remarkable 83 per cent of the time from 1980 to 2015.
Investors and commentators suggest a variety of explanations. However, there is no definitive cause or reason for the Santa rally phenomenon.
As investors make adjustments to their holdings and position their portfolios for the new calendar year they tend to be net buyers of shares as December 31 edges closer. Not to be overlooked is the fact that three of the four big banks all pay dividends in December.
This year, ANZ Banking Group, Westpac Banking Corp and National Australia Bank will pay out a combined $8.2 billion in dividends to shareholders between December 13 and 22. Assuming about 15 per cent of dividends are reinvested through dividend reinvestment plans, collectively investors will still receive almost $7 billion in cash to potentially invest in the sharemarket.
In spite of the additional buying occurring during this period, the absence of many market participants at their desks during the holidays has seen the volume of shares traded on the ASX fall markedly. For example, in recent months the sharemarket has had average daily volumes of about $5.7 billion. In comparison, over the last two weeks of December 2016 and the first week of January this year, average daily volumes dropped by 21 per cent to $4.5 billion.
In our view, the combined effect of investors' net buying and the market's constricted liquidity helps push share prices higher, creating a Santa rally at the end of the calendar year.
With the festive season upon us, investors may wonder if this year the sharemarket will bring them some cheer. With the outlook for interest rates to be lower for longer, many investors could be more inclined to reinvest their cash dividends into the sharemarket, rather than put them into term deposits with record low returns. Past experience would seem to give reason for optimism with the market outperforming on average over the holiday period. However, past performance is no guarantee of future performance.
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Chris is the Chief Investment Officer of Wilson Asset Management, having joined the company in 2006. He is also the Portfolio Manager responsible for WAM Capital (ASX:WAM), WAM Research (ASX:WAX), WAM Active (ASX:WAA) and WAM MicroCap (ASX:WMI).
Do Wilson’s have small mid cap fund that caters for people not chasing dividends
With all due respect, I do not agree. Our financial year ends on June 30. Losses are sold in June for tax reasons. In America, the financial year ends on December 31.
Not only that but we are running negative interest rates here if anyone bothers to check the RBA website.
"Santa rally" - Hmmm, the cynic in me might suggest this is a case of brokers and others talking up the market in the run up to the end of quarter and end of calendar year. We had what most commentators and analysts have said was a pretty underwhelming June 2017 reporting period so what's the basis for the new-found excitement ?