As December trading is about to begin, will the FTSE continue its historic rise?

<p>December trading has historically been a bullish month for global stock markets in general, and the FTSE 100 in particular. “The FTSE 100 is the […]</p>

December trading has historically been a bullish month for global stock markets in general, and the FTSE 100 in particular.

“The FTSE 100 is the only major global stock index to rally from the start to the end of December for every year since 2003.”

That’s 10 years on the trot. The Dow Jones and S&P have both enjoyed a similar run of form recently whilst the DAX and Nikkei have managed to rally in nine of the last 10 years in December. You can find out more about how the FTSE 100 has historically traded in December via our FTSE Trading Opportunity infographic.

Yet the FTSE 100 Index stands out.

Why does the market rally in December?

The ‘Santa Rally’ has been used to describe how the market typically turns bullish towards the end of the calendar year. There are a number of fundamental factors as to why the market typically turns bullish in December.

December is when bonuses are paid out, some as shares, and many individuals prefer to invest their bonuses into stocks. At the same time, as we head into the end of the calendar year, many portfolios start to get re-adjusted with some gains crystallised and immediately re-invested back into the market. Individuals also set up their portfolios for the next calendar year. On top of this, traded volumes in December are typically their lowest for the entire year. Low market volumes can add a degree of volatility as it only takes a handful of big share purchases to spike the markets higher.

Will this December be more of the same?

There are two key risks which could cause a market correction, but fortunately right now, both seem to be some distance away.

First and foremost, if the US Federal Reserve starts to taper its stimulus programme of $85bn each month – a truly astonishing amount of liquidity – earlier than currently anticipated, this could cause a market shock. It is unlikely that we will see the Fed taper until at the very least incoming Chairwoman Janet Yellen assumes the role from Ben Bernanke at the end of January.

At the same time, we know that the Fed previously postponed stimulus due to concerns over the debt ceiling negotiations, which will make a return in February next year after initial negotiations only temporarily raised the debt ceiling until February 7th. That said, the Treasury could create breathing space past this date if needed.

Secondly, an interest rate hike could also sap risk appetite. This is not envisioned for at least 18 months in the UK and so this remains one of the more distant risks. We also have the ECB in rate cutting mode, with some talk that we could even see negative rates for the euro zone, which remains a somewhat fanciful call.

The two key risks affecting the markets right now look unlikely at this point to deter investor appetite for risk beyond the traditional fundamental factors that typically support equity prices in December. In addition, there is an old saying in the markets ‘the trend is your friend.’ Well the FTSE rallying every December for the past decade is a distinctive and unavoidable trend.

There is every chance history will repeat itself this year as well.

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