Santa upstaged by Trump? Rally more to do with tax plan

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The ‘Santa rally’ is a well-established phenomenon in financial markets which has hard numbers to support it, but it may be just make believe this year.

The so-called Santa rally refers to the weeks before and immediately after Christmas during which shares have a tendency to collectively climb more than at other times of year.

The ‘Father Christmas climb’, as I would suggest it be renamed, has been a pretty reliable phenomenon over recent years.

The stock market climb this month is more to do with Donald Trump's tax plan than the traditional 'Santa rally'.

The stock market climb this month is more to do with Donald Trump’s tax plan than the traditional ‘Santa rally’.

According to numbers run by investment director at Architas, Adrian Lowcock, since 1984 the FTSE 100, excluding dividends, has risen by an average of 2.5% during December. The index has only fallen six times out of 33 during December.

The last two weeks of December are statistically the strongest two-week period of the whole year.

That does not mean that you should throw your money in just for a couple of weeks then pull it again of course.

Lowcock points out that if you only invested in the FTSE 100, including dividends, each December since 1986 your investment would have grown 79% including dividends, but if you had stayed invested all the time you would have seen a 1387% return before costs.

While we are definitely seeing a rally this time around, it is arguable that the imminent annual arrival of Santa to our homes has played little or no part in it.

US markets hit yet more record highs this week, with the Nasdaq tech stock index topping 7000 for the first time, the Dow Jones Industrial riding high at 24,792 and the S&P 500 at a very healthy 2,690 points.

Donald Trump's wife Melania with Santa Claus (presumably not the real one).

Donald Trump's wife Melania with Santa Claus (presumably not the real one).

Donald Trump’s wife Melania with Santa Claus (presumably not the real one).

The FTSE 100 is in on the party as well, despite daily doom-mongering headlines over Brexit. London’s top index is sitting around its record high at the time of writing at 7550.

Despite various geopolitical troubles, and the continuing domestic tension in the States since Donald Trump came to power, there is a consensus that his tax cuts plan making its way into reality has been a major boon for the stock market.

The plan lowers the seven individual income tax brackets, with the top rate falling from 39.6% to 37%, the 33% bracket falling to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%.

More importantly for stock prices, it is also proposed that the corporate tax rate be slashed to just 21% from 35%.

Whether these controversial, but bold plans were signed off in January, June or December, it seems highly likely the market reaction would be similarly strong.

America’s economy and its stock market has always had the power to pull the rest of the world up with it, or as was the case in 1929 and in 2008 drag everybody down. 

At the moment, it is very much the former of these two scenarios.

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