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Do Investors Feel SAD During Winter?

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Investors have long debated the effect that the shorter days and cold weather have on markets. Now, analysis from Brewin Dolphin – one of the UK’s leading wealth managers – has suggested that it tends to be a positive time for share indices.

Some studies have suggested that Seasonal Affective Disorder (SAD), a type of depression that recurs among some people during the winter months, means some investors tend to display aversion to financial risk and stick with safer choices.

A contending theory says that the opposite is true – a Santa Rally sees markets head in a positive direction, buoyed by Christmas cheer and helped by tax considerations and annual bonuses.

Looking back through more than 30 years of market data, Brewin Dolphin has found the last two months of the year have outperformed the previous ten months 73.5% of the time – in 25 years out of the 34 recorded.

On average, the FTSE 100 gained 1.43% in the final two months of the year, from 19842 to 2017 – more than three-times as much as the first 10 months of the year (0.41%) and more than twice the average return for the full 12 months (0.60%).

The numbers were mirrored in the FTSE All-Share between 1980 and 2017, where November and December’s average monthly gain was also 1.43%, compared with 0.60% and 0.76% for 10 and 12 months respectively. November and December beat the 10 and 12-month averages on 27 out of 38 years from 1980 – or 71% of the time.

Richard Kelly, Investment Manager at Brewin Dolphin Cardiff, said:

“In some ways, there’s a compelling argument for SAD – the long, dark nights make everyone feel down and more risk averse. However, market data suggests the opposite is true: November and December have outperformed the rest of the year by reasonable margins on both the FTSE 100 and the FTSE All-Share, around three-quarters of the time. The only notable exceptions were some years in the 1980s and in 2007, as the financial crisis started to set in. But, from this data, it would appear the Santa Rally is real.

“You could make the case that the Santa Rally is almost a self-fulfilling prophecy. Investors anticipate it and try to get in ahead of everyone else. Historically, the best couple of weeks tend to begin after December 10, but it’s being pushed into earlier in the year because of this phenomenon.

“The big question is whether there will be another Santa Rally this year. In that respect, Brexit could very much ruin Christmas, depending on how negotiations progress.”