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HOW SANTA RALLIES DOWN UNDER
It's no secret the ups and downs of the Australian Stock Exchange (ASX) are influenced by the fears and triumphs of the rest of the world. Usually, the opening level of the ASX is often determined by what occurred on the US stock markets (i.e. indices like the Down Jones and/or S&P 500) while we were asleep. In other words, good news from the US markets usually means good news for us. So when US markets rally at Christmas time, which they often tend to do, should we be playing on this trend back home? Well, it's not so simple. We take a look at what happens to the ASX around the holiday season and how this differs from overseas markets.
Why are Australian markets so influenced by news from the other side of the world in the first place? The ASX tends to mirror the sentiment of overseas markets because firstly, 40% of Australian shares are actually owned outside Australia. Secondly, many of our industries are reliant on the growth of overseas industries. China is an obvious example. Growth and slowing in China directly affects Australian corporations dependent on Chinese demand.
Does Santa Rally Down Under?We all know about the 'Santa Rally', a term coined in the US for a phenomenon where markets perform well over the Christmas period. So given how closely Australian markets follow US markets, is this something Australian traders should be cashing in on each year?
Traditionally, the USA sees trading days around Christmas and into early January as more optimistic days in the stock market - and, unlike the rest of the year, the positive days move the market up more than the negative days move it down. In fact if you look back over the past 45 Christmas seasons in the US, 75% of those were considered Santa rallies.
This festive trend has been attributed to a multitude of factors working together; such as anticipation of the January Effect (stocks rising more than usual), a more festive sentiment, and/or tax strategies among traders (the American tax year is Jan 1st to Dec 31st). Does the Australian market experience the same good vibes and rally through Christmas like in the US?
Just last year, from October the ASX 200 started to climb after months of stagnation and uncertainty, but reached a decade high by the end of December, giving investors a double-digit total return.
The Christmas results of 2016 were bound to be interesting, with the unpredictable Donald Trump taking his election win that November. Initially, investors everywhere were unsure how to react, but the ASX did experience a Santa Rally that year, surging up to 5640 points before Christmas eve. By the end of the year, the ASX 200 had risen by 7% - the strongest gain since 2013. And if you look back further, more rallies exist around the Christmas season.
The Santa Rally ClauseThe charts speak for themselves - the ASX does indeed tend to rally through Christmas more often than not, reflecting the sentiment in other countries. However, the Australian Santa Rally seems to come with a minor clause.
In comparison to other rallies, in the US and elsewhere, the Christmas season Down Under tends to be more... lacklustre. For example, last year's rally paled in comparison to the 20 per cent gain seen across developed economy bourses that season, and a more than 30 per cent gain in Asia. And in 2016, both the S&P 500 and Dow Jones soared to record highs the week prior to Christmas, yet we didn't see the same optimism on the ASX. Further still, in 2014 the major US indices experienced their biggest gains in over a year in the lead up to Christmas but the ASX 200 fell short yet again, only gaining about 0.25%.
News outlets can tout "impressive" Christmas rallies all they like, but what the ASX experiences during the festive season is comparatively sluggish.
Are we surprised? Christmas isn't the only time we've underperformed. During the 2008 financial crisis for example, the US and Australian markets took similar hits yet our recovery has been much longer and slower in comparison. Market strategists blame our lack of sector diversity, since the ASX is dominated by mines and banks (nearly 53% combined) with very few stocks in technology. The problem with this, they argue, is firstly the ASX misses out on the excitement of our era's global technology booms. And secondly, many foreign investors - without local knowledge - tend to misguidedly view Australian financials and commodities as risky stocks and invest elsewhere.
2018, Naughty or Nice?The question on many a trader's mind is whether or not will we see a Santa Rally this year, considering how volatile the markets have been both here and overseas. Already we're seeing a marked difference compared to last year's strong end-of-year climb. Interest rates, global economy concerns, and a slew of disappointing company earnings reports have been affecting the charts and the volatility is expected to continue into 2019.
It's not like we haven't rallied out of rough seas before, but so far it's looking like we'll need a Christmas Miracle if we are to match end-of-year predictions touted by some financial houses. The very recent trade tariff moratorium between the US and China might not be enough to cut it. If you remember, Goldman Sachs and Macquarie predicted the ASX 200 will finish 2018 at 6,500 points. Perhaps Morgan Stanley, the naysayers of 2018, had the most realistic outlook when they predicted a 3% slide to finish on 5,800.
It's worth keeping a close eye on what the market does this Christmas as whether Santa visits or not matters in the long run. Historically, when we don't see a Santa Clause rally it foreshadows the market outcome for the following year. Two stark examples of this are the 4% decline during Christmas 1999, which was followed by a 33% retreat in the ensuing bear market. And the decline at the end of 2007, seemingly foreshadowing 2008's GFC.
While we can't predict the future, what we do know is the ASX tends to mirror trends from across the pond, but with much less vigour. In the long-run, this can make a big difference to a portfolio when compounded over several years. This raises an important consideration for Australian investors. While the ASX is our trusted home exchange, it might also be worth including some or more international stock markets to diversify and strengthen one's portfolio.
If you've been considering international exchanges, take advantage of our Christmas Special - 10% off our ASX/USA Data Pack*. Now only $661.50 (RRP
First Published: 11 December 2018 - Copyright © Electronic Information Solutions Pty Ltd 1990 - . All Rights Reserved.
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