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End Of Year Rally. Fact or Fiction?

Posted by: Brian Dennehy
Membership level: Free
 
We’re coming to the end of another interesting year. As we approach 2019, equity markets have been up-and-down leaving investors with lots of questions. Can we expect further gains from the typical end of year rally or Santa Claus rally?  Does it exist at all?
 
Does the end of year rally exist? 
 
Table 1 (see the foot of this article) looks at the price return of the FTSE 100 from 1st November to the end of the year, for each of the calendar years since 2000.
  • In 14 of the last 18 years the FTSE 100 has produced a positive return from 1st November to the end of the same year.
  • And even when the return for the year has been negative (7 years), in 57% of those years there has been a bounce in the last two months of the year.
  • Taken at face value the data would suggest that there is some basis of fact in the ‘end of year rally’ phenomenon. 
But will there be one this year?
 
The FTSE is down 7.12% after a volatile year (see Chart 1), with much of that fall coming in September to October.  In 60% of instances where the September-October return was negative we have seen a positive return in the final months of the year.  If recent history is to be believed then the bounce markets are enjoying in recent days may continue to year end.  
 
As always past performance is no guarantee of future returns.  As Table 1 (below) highlights investors need to be mindful of the exceptions.  In 2008, any gains from the previous 2 years were completely erased in September-October when Lehman Brothers filed for bankruptcy and equity markets collapsed.
 
Day trader vs. Investor
 
While ‘day traders’ might trade on the possibility of an end of year rally, long term investors need to focus on long term trends, namely:
  • The long-term support level for the FTSE 100 is 6000, at best (16% below todays level)
  • The uptrend which began in 2009 is showing signs of rolling over
  • The latter observation also applies to the pivotal US stock market
More generally, there’s far too much domestic uncertainty due to Brexit.  
 
In summary, investors should be careful not to fall victim to the siren song of the “end of year rally”.
 
ACTION FOR INVESTORS
  • Trying to time the market with lump sum investments is very difficult.
  • If you are looking to invest significant lump sums right now you can sidestep the market timing risk by drip feeding your money in each month, possibly over years.
FURTHER READING
 
Table 1: Annual, Sept-Oct and Nov-Dec price performance of the FTSE 100 since 2000
 
Year
Price return for year
1 Sept- 31 Oct
1 Nov-31 Dec
2000
-10.2
-5.3
-3.6
2001
-16.2
-5.7
2.9
2002
-24.5
-4.4
-1.4
2003
13.6
2.0
4.4
2004
7.5
2.7
3.0
2005
16.7
-0.2
5.1
2006
10.7
3.0
1.2
2007
3.8
6.6
-2.0
2008
-31.3
-21.9
1.3
2009
22.1
4.7
7.3
2010
9.0
5.8
3.6
2011
-5.6
2.3
2.8
2012
5.8
1.3
0.6
2013
14.4
5.0
0.2
2014
-2.7
-4.1
0.3
2015
-4.9
5.0
-1.9
2016
14.4
3.1
3.3
2017
7.6
0.7
2.7
2018
???
-4.1
???
 
Chart 1: Price performance of the FTSE year to date

Topic: Market commentary


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