Market update 1st December 2016

Looking for the Santa Rally?

It’s there, it’s true and it’s for traders, not investors. The Santa Rally is defined as “the surge in stock market prices that has often occurred in the week before Christmas (positive in six of the past seven years) or the week between Christmas and the New Year (negative in four of the seven years).”

However, the UK Stock Market Almanac tells us that December is the best month for shares, the increase has, on average, been 2.3%. In the 28 years since 1984 the market has only fallen five times in December. Similar returns have been seen in 70 equity markets.

Investment Returns

This has been a year when on a year-to-date basis to 30 November emerging and frontier markets have shone with 15 markets growing in double figures and only Egypt, Italy and Spain recording negative figures. However, that party may be over because, except for Russia, they were all negative in the month of November. Also positive in November were the USA, oil, both Brent and Texas, and the Investment Association sector UK Smaller Companies. The main reason for the end of the emerging and frontier markets bonanza was the election of Donald Trump. A rising dollar is bad news for economies that are paying interest on loans that are denominated in dollars.

Politics and Economics

It is often argued that stock markets follow a different agenda and take little notice of the fashions and headlines that fill the news bulletins online or in print. This is obviously not entirely true as the effect of a rising dollar on emerging and frontier markets is described above. Brexit, good or bad, is rarely out of the headlines and, to take just one item, the Financial Times reported a speech by Kirstin Forbes, a member of the Bank of England’s Monetary Policy Committee, who said that “the Brexit impact on the British economy is overstated – UK economic performance has been solid”. At the same time the Financial Times was reporting that “the Eurozone shrugs off political uncertainty” with business growing at the fastest rate this year as order books fill up. It may be another occasion when business is getting on with the job while the politicians ‘play politics’.

What will be the effect of rising interest rates?

Interest rates are not likely to rise until inflation is rising and the economy is over-heating. One result of rising interest rates will be heavy losses for most holders of government stock, gilts. Most prices are well above par and the investments risk is high.

So What?

The US economy and stock markets have been boosted by the arrival of President-elect Donald Trump. If his team succeed in persuading the US Treasury and Congress to reduce taxes, we may see the Dow Jones stay above 19,000 for several years.

Robert Bewell

About Robert Bewell

Retired Branch Principal & Wealth Manager - Raymond James, Hitchin. Robert has a positive view on risk management and volatility and an enthusiasm for both fundamental and technical analysis. Robert retired in 2016 after more than 30 years in the financial industry. He co-founded the Raymond James, Hitchin office with his daughter Susie, who is now joint branch principal with Faye Silver. Robert lives in Letchworth with his wife Jane and enjoys the company of his daughters and grandchildren.

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