The Santa rally… and why this one could be one for the ages

Some age-old adages invariably keep ringing true in financial markets.

Anniversaries of stock market crashes spring to mind, as does the “sell in May’ phenomenon. But the one that has always intrigued Bookbuilds and Banter the most is the annual, end-of-year “Santa rally”.

Ultimately, it is the herd mentality that moves markets. We’ve seen the meme stock movement in the speculative sectors that occurs when the “herd” – in this instance, online, faceless, cashed-up traders – rush into the next big runner with the hope that some under-the-radar stock might muster up a magical rally.  But the real question remains – why should a market behave in the same way and at the same time each year in the lead up to Christmas?

For investors, the Santa rally represents the final run into the end of the calendar year and although it is not a guarantee, markets, or at the very least certain individual stocks, seem to have an enormous rally going into the end of the year.

So, what has the ASX actually done this year?

The XJO index started the year on January 3 at 7046. As at the close of business on November 24, the XJO has managed a marginal retreat, limping backwards to 7040 – basically holding the same level through the course of the year. It is interesting to note that this figure is slightly lower than where the XJO was trading in Feb 2020, just before the COVID crash!

While there have been some terrific rallies and buying opportunities in the past few years, the broader market has essentially consolidated in a sideways pattern, with no real upward trend in place.

Does this consolidation in a period of close to three years suggest that our market is again primed for liftoff? After long periods of pause, markets often move into longer-term trending periods.

Ok, so let’s look at some of the reasons why we could be in for a rally this December.

Are we at or close to the end of the rising interest rate cycle?

After the most profound global experiment in stimulus and handouts of our time following COVID, we have just lived through the most rapid interest-rate tightening cycle in history. The Reserve Bank of Australia started lifting rates in May last year and within 18 months, we witnessed 13 rate rises on the trot with the cash rate now locked in at 4.35%.

Interest rates ultimately measure the cost of money and the rising cycle is representative of a market where investors are paying more for capital. In many instances, investors have moved capital away from equities and risk and into longer-duration assets including cash and term deposits, which have finally re-emerged as a real low-risk asset class for the first time in many years.

For most market commentators, it is apparent that this cycle of lifting rates is almost complete and many believe the RBA will not lift rates any further. However, in any event, any further rate rise is likely to be the last.

As markets are forward-looking, investors are likely to start repositioning investments to take advantage of loosening credit conditions and falling interest rates, which could come as early as June next year based on current futures pricing.

What we do know is a reduction in rates in the future may light a rocket under the market, with capital returning into growth and risk-style assets.

And as the rise of the fund manager continues, we see more and more money deployed on an ongoing basis into their coffers and into those of professional investors. This space is incredibly competitive and fund managers compete with their peers for their share of every investor dollar, including the enormous wave of superannuation dollars that are looking for a home each and every month.

Returns are key and managers are always trying to make the smallest efficiencies to outperform their peers and ultimately compete for the investor dollar.

Bookbuilds and Banter is not making accusations, however performance is typically measured on a quarterly, half-yearly and annual basis. The December 31 cut-off period represents the first half of the financial year and is a good benchmark for managers to compare returns and to measure how strong (or poor) the annual performance is likely to be.

There is a definitive benefit in achieving strong closing prices at the end of the calendar year, enabling the managers to promote their performance and investment valuations – and don’t underestimate their collective ability to impact markets or their will to do so as the half year draws to an end.

After such a long period of consolidation and the very real possibility of rate cuts in 2024, investors should keep a keen eye on the macro environment and not look to fight the herd. Look for trends and take note if and when money starts to return to markets with real force.

Watching M&A activity, takeovers, significant capital raisings and even stock reactions following ASX releases can give an intuitive feel for what the herd is doing.

Now, let’s hope Santa is able to kick start a rally into the new year. For many punters, it has been a difficult couple of years, with the exception only coming from a handful of critical mineral explorers making discoveries and shareholders who fortunately were the recipients of successful takeovers.

After many years in the market, Bookbuilds and Banter feels like the necessary moons are aligning for a Santa-led rally into the new year and for some it can’t come soon enough. And let’s all ho-ho-hope there are better times ahead.

_{Davide Bosio is the WA State Manager and Director of Corporate Finance at investment and wealth management firm Shaw and Partners. For 22 years he has been immersed in the WA finance industry offering corporate services and strategic advice to private and public organisations, specifically in relation to capital raisings and M&A advice. He has also been to the other side having been a director of multiple ASX-listed public companies. While he is the State Manager of Shaw and Partners (AFSL 236 048) this column is for information and entertainment purposes only and is not intended to constitute financial advice. The views and opinions contained within are those of the author and do not necessarily represent those of Bulls N’ Bears, this media outlet or Shaw and Partners.}