(News Bulletin 247) – The “Christmas rally” phenomenon, which highlights a strong increase in indices over the last weeks of the year, could save the performance of lagging markets. But be careful not to take it for granted.

This is the traditional question that burns investors’ lips in this last month of the year: will the markets have their end-of-year rally? The euphoria is visible on Wall Street which has set records this year. But also closer to home. In Germany, the DAX 40, the largest index on the Frankfurt Stock Exchange, gains 21.8% over the whole of 2024, which allowed it to cross the threshold of 20,000 points for the first time in its history at the beginning of December .

In France, this end-of-year rally would be welcome. Since the start of the year, the CAC 40 has been in the red (-1.62%), which is not the case for any other major European stock market. To give an idea, the Stoxx Europe 600, a pan-European index, increased by 8.5% over the same period (performance as of December 12, closing).

An underperformance which is due both to the political context since the dissolution of the National Assembly in June, and to the poor performance of luxury groups, heavyweights of the CAC 40, which are weighed down by the economic slowdown of the China.

But for Christopher Dembik, investment strategy advisor at Pictet AM, hopes of an end-of-year rally for the CAC 40 are low. Unless there is a Christmas miracle. “We think it’s going to be complicated. Savers have fully understood that if they are looking for yield it is better to hold American assets than French assets. We are seeing outflows from France to the United States. Unfortunately for the stock market from Paris, it should increase,” says the specialist.

What is the Santa Claus Rally?

The CAC 40 therefore risks seeing Santa’s sleigh pass in front of it on the side of the road. And yet, the month of December is statistically one of the best of the year on the stock markets. It’s called the Christmas Rally (in English Christmas Rally).

Since the 1970s, the pre-eminence of the month of December was popularized by the “trader’s almanac” (Stock Trader’s Almanac, one of the first publications to focus on highlighting the different seasonal cycles on the stock market). The almanac, created by Yale Hirsch and edited today by his son Jeffrey, highlighted this “Santa Claus Rally”, covering more specifically the period of the last five sessions of the year and the first two of the new year).

There is no single cause for this boom in the markets, notes broker Degiro. This festive mood on the stock markets would be linked to the holiday spirit which “fuels the optimism” of operators at this time of the year. With their end-of-year bonuses in their pockets, investors would also be more inclined to take action on the financial markets. “During this period, institutional investors are on vacation, which gives more influence to individuals, who tend to be more bullish,” adds Degiro.

“Fund managers, who represent a significant part of the shareholders, rebalance their portfolios before the end of the year” (“window dressing”) to try to display as much as possible lines of added value among their main positions”, noted David Brett, a former trader then financial journalist, now an editorial writer at Schroders.

A rally favorable to American stocks

In a short post published at the start of the week, Deutsche Bank recalled that the average fourth quarter performance of the pan-European Stoxx Europe 600 index is historically (from 1987 to 2023) 3%, compared to an average of only 1% for the others. quarters.

In the United States, “seasonality as well as positioning are still favorable to American stocks and argue in favor of an end-of-year rally”, notes, for his part, Christopher Dembik.

The specialist recalls that the median return of the S&P 500 over the last two months of the year is 5.22% on average since 1928. In an election year, like this year, it is even slightly higher, at 6.25%. on average.

Above all, the good stock market performance recorded by the American markets since January is not a brake on the continued rise, believes Christopher Dembik. “Statistically, since 1928, after a 25% increase in the S&P 500, the performance is on average 8.66% the following year. The performance can even approach 10% if the index gains more than 30%. We “We’re not far from it with an increase since January of 26.50%”, he says.

However, past performance “is not indicative of present performance, and stock market superstitions are only real until they are disproved”, warns David Brett.

Note that another, slightly less known stock market belief will take over from the end-of-year rally. This is the January effect which means that small caps outperform the heavyweights of the stock during the first month of the year. A phenomenon which can be explained in particular by the “window dressing” of managers and the tax optimization of individuals.