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Year End Rally? Fact or Fiction?

Posted by: Sam Lees
Membership level: Free
 
Although the general election will pre-occupy most, no doubt one fund manager or another will encourage investors to buy a year-end rally while you can. (We’ve already seen this from a few different sources!) Fact or fiction? Let’s explore that.

While the general election will be a big factor for UK investors in the next few months, the “Santa rally” is already being debated in the states. 
 
Bloomberg recently ran the headline: “’Powerfully’ Bullish Setup Fuels Year-End Optimism in Stocks”. But analysts at Elliott Wave caution that:
 
“Seasonal trends are great to be aware of but are not a reason alone to be bullish stocks. It was only last year that the stock market plunged in November and December.”
 
As we know, where the US market goes the UK tends to follow, so, our general election allowing, momentum up or down in the US may well drive markets on this side of the Atlantic.
 
Does the end of year rally exist? 
 
Table 1 (see the end of this article) looks at the price return of the FTSE 100 from 1st September to the end of the year, for each of the calendar years since 2000.
  • In 14 of the last 19 years the FTSE 100 has produced a positive return from 1st November to the end of the same year.
  • And in 10 of those periods (71%) the November/December return is greater than the September/October return.
Taken at face value the data would suggest that there may be some basis of fact in the ‘end of year rally’ phenomenon. 
 
But will there be one this year?
 
The FTSE 100 is up 10% after a volatile year. It was up over 14% in July but falls came at the end of July and September/October.  The FTSE is up for September/October by 0.6%.
 
In 83% of instances where the September/October return was positive 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 two 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 (18% below today’s level).
  • The uptrend which began in 2009 is showing signs of topping and rolling over (see our recent teleconference for more on this).
  • The latter observation also applies to the pivotal US stock market.
 
And there’s a huge amount of domestic uncertainty due to the general election.
 
So, while a year-end rally may grab your attention, do tread carefully.
 
ACTION FOR INVESTORS
  • Trying to time the market with lump sum investments is very difficult.
  • Consider high cash weightings at this toppy stage in the cycle.
  • If you are looking to invest right now consider drip feeding your money in monthly, 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
-12.5
-4.1
-5.4
2019
???
0.6
???
Topic: Market commentary


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