The Santa rally and 10 stocks that led the market in 2019

The stock market typically excels around Christmas time. These stocks already have the wind behind them.

Followers of stock market anomalies will know that this is the time of year when the fabled Santa rally is due to get under way. The good news for UK investors of course, is that a favorably timed general election (paired with an outcome the market liked) has got things off to a solid start…

Past performance is not a guide to future performance

If you want someone to blame for the annual blizzard of Santa rally headlines, look no further than Yale Hirsch, the founder of the Stock Trader’s Almanac. His research back in the 1970s sparked an enduring myth that markets tend to rise through the second half of December and into the new year.

A quick look at recent history suggests this doesn’t always happen (last year the market slumped in December only to recover in January). But that hasn’t tainted enthusiasm for these kinds of seasonal events (for the most part).

In fact, the Santa Rally is just one of several calendar effects that have turned heads over the years. Others include the Halloween effect, the January effect, the turn-of-the-month effect, the holiday effect and even the weekend effect.

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If you’re feeling a bit incredulous about all these ‘effects’, you’d half-way right. Research a few years back by Laurens Swinkels and Pim van Vliet at the Dutch quant investment firm Robeco, analysed them and came up with a couple of conclusions. 

First was that the January effect, the weekend effect and the holiday effect don’t stand up to scrutiny. The return performance was nothing special and they only worked when they coincided with other, more influential calendar events. Second, and more promising, was that the Halloween effect and the turn-of-the-month effect do indeed tend to see outsize returns. Why would that be? It’s not exactly clear.

What happened in 2019?

Regardless of whether the Santa rally continues to gain ground, this week we’re indulging in a review of some of the biggest stock market winners of 2019. 

In many cases, the outcome of the General Election has had a big, last-minute influence. For now, a Conservative majority, and the relative certainty that brings, has lifted sterling and inspired confidence in UK-centric companies. Cyclicals, financials and industrials exposed to UK consumers and potential increases in construction and infrastructure spending have been some of the early winners. As a result, small and mid-cap indices have been rallying. 

The rules for this screen are simply that the shares belong to the main FTSE 100, 250 and SmallCap universe, sorted by percentage price change over one year. We’ve included their current Risk Rating classification - which ranges from Highly Speculative, Speculative, Adventurous, Balanced and Conservative - as a measure of volatility based on the standard deviation of three-year daily price returns. 

Also included is the StockRank Style - our framework for assessing the exposure of each stock to the three factors of quality, value and momentum. High quality, fast momentum (but pricey stocks) are classified as High Flyers.

As you can see, the late surge in prices following the election has propelled a number of consumer-facing retailers, such as Dunelm (LSE:DNLM), JD Sports (LSE:JD.), Pets at Home (LSE:PETS) and Games Workshop (LSE:GAW), as well as the consumer publishing business Future and the gaming and casino operator, Rank (LSE:RNK).

Over 12 months, the overall market leader is the small-cap LED lighting business, Luceco (LSE:LUCE), with others making the list including the gold mining company Petropavlovsk (LSE:POG), the workspace company IWG (LSE:IWG), and the landscaping products group, Marshalls (LSE:MSLH).

Setting the scene for 2020

The post-election bounce in equities has been a welcome end to an uncertain year for investors - and perfect timing for followers of the Santa rally. So far, domestically-focused small- and mid-cap shares have enjoyed a solid lift and it’s notable that some of the FTSE’s best performing shares this year are now found among a collection of higher quality names in cyclical sectors like retail. 

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• Record boom in stock market optimism

All eyes are now on whether this late boost for the stock market can carry on into 2020 and if this new sense of confidence in UK stocks will be a gift that keeps on giving.

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