Will the Federal Reserve and Bank of England sprinkle some seasonal goodwill on financial markets and salvage the Santa Rally?

With global markets off to a sluggish December and investors debating whether a Santa Rally will appear, Pacome Breton, head of portfolio management at J.P. Morgan Personal Investing, examines the drivers of year-end volatility — from crypto swings to central bank decisions.

Pacome Breton, head of portfolio management at J.P. Morgan Personal Investing:

“Investors hoping to receive some ‘seasonal goodwill’ from global markets this month might be feeling disappointed after a slow start to trading. Markets have been sluggish so far in December, with the FTSE 100 falling back after a flat November. This has led some investors to start doubting if a Santa Rally will materialise this year.

“The extreme volatility seen in crypto prices has amplified the recent sense of uncertainty across financial markets. Depending on where this volatility nets out, it could actually help markets overcome current anxiety and boost returns going into the Christmas period. This is because markets have a tendency to climb the wall of worry as high levels of cautiousness can lead to investors being underinvested, fuelling a rush to buy back in.

“Some investors will be pinning their hopes over the next fortnight on the Federal Reserve and Bank of England, who are both expected to make one more rate cut at their last meeting of the year. While this is priced in and unlikely to move markets in the short-term, we have seen over the past two years how rate cuts are a key driver for equities.

“On the flip side, if US inflation surprises to the upside, it could derail markets and negatively impact portfolios before Christmas. Early December PMI data suggests no major surprise, but markets will be watching for any downside. Attention will also turn to who the US President picks to replace Jerome Powell as Fed Chair in the new year. A more dovish Governor, open to a faster rate cutting cycle, could boost equity markets but the impact on bond markets is uncertain in this scenario.

The Santa Rally phenomena

“While the Santa Rally has been an attractive theory for investors to believe in over the last few years, and there is some logic to this belief, it is clear from the data that market performance in December can be volatile. Our research shows that December has been the month with the highest proportion of positive returns (70%) but gains are not spread out equally across markets.

“Looking at past performance, a Santa Rally is by no means guaranteed and can often form earlier in the fourth quarter. Last year, markets lost momentum in December with the S&P 500 and FTSE 100 trimming gains made in November while the Japan index was up over 4%. This just goes to show the value of global diversification and being able to capture periods of strong market performance wherever growth appears.”