Why winter buying favours stocks

Indeed, according to data, the average return in the stock markets during the winter months is 7%, versus around 2% during the summer. So, why might this be the case?

For one, as investors return from their summer holidays, new strategies are deployed, businesses tax years conclude, and the market is flooded with capital, there is simply more money in the market.

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Another reason is the so-called Santa Rally, which occurs in the last five sessions of trading in December and first two sessions of January.

In this period, optimism about the incoming new year, holiday consumer spending, and maybe even the Christmas spirit contribute to a period of sustained increases in stock prices.

Between 2011 and 2021, for example, the S&P 500 suffered declines just twice during the Santa Rally, gaining 1% on average, but which sectors tend to perform best?

Which sectors outperform in winter?

In the UK, consumers use 36% more energy in winter. Therefore, stocks for energy and utility companies get an inevitable boost. For example, the Invesco Dynamic Energy Exploration & Production ETF (PXE) enjoyed returns of 2.94% between 31 October 2021 and 30 April 2022.

Likewise, consumer essentials often outperform other stocks during the winter. Generally, demand for things like food, drinks, household goods, and alcohol tend to increase, especially around holidays.

As a result, companies that sell consumer essentials enjoy a lift in the winter months. For example, in the winter of 2021/2022, Unilever’s shares delivered gains of 2.2%.

This summer, Unilever’s shares only gained 1.9%.

For grocery stores, the Christmas period produces higher profits because consumers spend 29% more in December than a typical month.

This is reflected by Sainsbury’s, which saw share prices increase by 2.9% last winter.

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Finally, health industry stocks normally get a boost during the winter due to an uptick in illness. With more people getting colds or seasonal health complaints such as the flu, stocks for pharmaceutical companies, drug stores, flu test makers and vaccine producers often see their profits gain during the winter period. Consequently, their share prices often inflate.

Evidence of a Santa Rally

Certainly, the statistical evidence is clear. For instance, between 1950 and 2020, a so-called Santa Rally has occurred on 57 occasions. For the S&P500, this has translated into an average gain of 1.3%.

A particularly prominent Santa Rally occurred in December 2008. Between Christmas Eve and 5 January 2009, the S&P 500 gained 7.36%, bringing a much-needed sense of respite to the index that had suffered a decline of more than 40% in the year because of the financial crash.

Similarly, for the FTSE 100 index, average monthly return in December sits at 2%, which is higher than any other month since 1996, except April.

Moreover, at 3%, December also has the lowest standard deviation of returns.

What could pressure a Santa Rally this Christmas?

This evidence shows that Santa Rallies can provide some relief to stock markets that have been struggling for the rest of the year.

Following the geopolitical and economic turmoil that we have seen so far in 2022, it is likely that the stock markets will be holding out for a strong period at the end of this year.

However, there are a few aspects of the current economic climate that might pressure a Santa Rally.

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For instance, the war in Ukraine has pushed inflation into double figures once more and created an energy crisis that the world is continuing to grapple with.

As a result of these rising costs, businesses have seen their profit margins shrinking, which has had a knock-on effect on their share prices.

The tech industry has felt this impact in particular, with some tech stocks declining by 75% from their highs last year.

To make matters worse, aggressive central bank action to combat inflation is likely to limit growth, forcing many economies around the globe closer to the precipice of a recession.

Consequently, the uptick in investor confidence that the Santa Rally relies on each year might not occur to the same extent.

Likewise, during a cost-of-living crisis, consumer confidence will be similarly low. As a result, there could be less spending in the run up to Christmas, which is also likely to harm stock performances.

Given the degree of uncertainty and volatility in the global economy, it is challenging to predict how the markets will move.

Nevertheless, investors should keep in mind that seasonal trends like the Santa Rally happen for a reason, so they would be wise to take note of them. 

Giles Coghlan is chief market analyst at HYCM

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