The end-of-year rally is perhaps one of the best-known fair myths there is. Dutch investors and media in particular like to take the floor every year and also brokers vergelijken in The Netherlands is getting more interesting. But in the US, the phenomenon is perhaps even more visible. There people often talk about a so-called Santa Claus Rally. An end-of-year rally simply indicates a sharp rise in share prices in the last weeks of the year. There is no fixed term, but most stock market analysts like to drop the term at the beginning of November.
- Some researchers claim that these securities do even better with small funds (the so-called small-firm effect).
- Incidentally, the term does not come out of the blue. After all, historical results show that the term does have legs to stand on.
The table below shows that the end-of-year rally is based on historical data. The returns in both November and December are above the averages in almost all periods surveyed. What is more striking is that the last 30 years, especially November has turned out to be a very good month for the stock market. Between 1950 and 2019, prices rose in 67% of the cases in November. For December, the S&P 500 even showed an increase in 74% of the cases.
What’s more striking is that January is also historically a strong stock market month. This, of course, has not gone unnoticed by investors either, and that is where the January effect comes from again. Between 1928 and 2019, the S&P 500 rose 62% (57 out of 92) in January. That 62% does not seem much, but the average returns are still very good. The month of January therefore causes above-average rises, and if the market falls in January, these falls will usually be small.
Causes end of year rally
There are a number of causes to think of for an end-of-year rally. One of the reasons would be the fact that fund managers clean up at the end of the year. The shares with losses are removed from the portfolio and the winners are added. The question is whether this really causes the indices to rise. In any case, it does create more volume on the stock markets and possibly an exaggeration effect of all the sharply risen shares. There are also several theories that simply point to the fact that the economy is doing better towards the holidays. Consumers go shopping more and the optimism in the stock market is fuelled by the vacation feeling.
The January effect
Other researchers point to the fact that end-of-year rallies simply anticipate the January effect. Some investors in the US, for example, close their profitable positions before the end of the year in connection with the tax return. These investors will open new positions in January, which is why January was historically a good month for the stock market. In the above data you can also see that the two left columns show the largest returns in January. In the two columns on the right it is the months of November and December that show the strongest returns.
The year-end rally can therefore perhaps be seen as an early January effect. Smart investors try to be ahead of the January effect by buying shares towards the end of the year.
Declarations for the January effect are quite divergent. Scientists saw the US tax legislation as the most important explanation. Another argument is “window dressing”, the shares sold by fund managers in December may be repurchased in January. As a final argument, the bonuses paid out in January can be seen as additional funds for investors.
Will there be an end-of-year rally in 2020?
The 2020 year-end rally seems to have already started. Since the start of November, the S&P 500 has already risen by about 10%. The AEX index even went up by almost 13%. However, the increase fell at the same time as the elections in the United States. There was also good news about a possible corona vaccine. These increases can therefore mainly be attributed to that, also aandelen Apple have been very strong in The Dutch Market.
The question now is whether the increase will continue in the coming weeks. Historically at least November and December are strong stock market months. But, of course, past results are no guarantee for the future. Also note that the historical data only show average increases.