November has capped off the best three months for global stocks since the Covid-rebound in late 2020, with some predicting the much-feted Santa rally could push share prices even higher in the run-up to Christmas.
The S&P 500 and Nasdaq, and India’s Nifty 50 were among those that enjoyed their best month in over a year, or close to highs, while global indices like the MSCI International and FTSE All-World delivered star turns not seen in three years with near-9% gains.
For some markets, such as the S&P, Nasdaq and MSCI, the rally in 2023 has nearly erased the losses the year before, while the Nifty 50 and Japan’s Nikkei (up almost 6%) are pushing all-time highs.
Global stock funds have seen the strongest inflows in over 18 months in the two weeks to November 21, according to EPFR Global data cited in a note from Bank of America.
Will the UK join the party?
With equity markets rebounding in the last weeks, “momentum looks very favorable for holding small caps”, said strategists at Deutsche Bank, as small caps historically “do well in bull markets”.
They highlighted that European and UK small and mid-cap (SMID) stocks are on attractive price/earnings discounts to their own history and compared to large cap shares.
“While US small caps also screen cheap, European SMIDs are showing more resilient earnings and an even deeper discount to large caps,” the Deutsche team said.
With so many companies warning on profits of late – see global consumer facing giants like Diageo and Ford, along with Dr Martens, Kingfisher, Halfords and Best Buy on either side of the Atlantic in the past month – talk of a bull market might seem incongruous.
It comes with a large number of stocks hitting multi-year and 52-week lows (Burberry, Diageo, AstraZeneca, Entain to name a few) but seemingly just as many pushing new highs (Shell, Sage, LSEG, AB Foods, as some examples).
Forward looking markets
Part of the momentum has come as the stock and bond markets have grabbed hold of the likelihood of a “soft landing” from the interest rate hikes seen over the past two years.
Unemployment is generally low and inflation has been coming down fast, though the war in Ukraine continues and fighting in Gaza is on hold due to temporary ceasefires, there are still expectations of recession or downturns due to the cumulative effect of interest rate rises.
But recent economic data “reinforces the idea of the Goldilocks slowdown,” Rebecca Patterson, former chief investment strategist at Bridgewater Associates, told Bloomberg, as the fall in US inflation “hasn’t been unduly impinging growth”.
A major factor for European momentum, strategists at UBS observed this week, is that hedge funds were rushing to close short positions.
Even so, the momentum and the UK's discounted valuation is "increasingly looking like a once-in-a-lifetime opportunity", according to FreeTrade spokesman Alex Campbell.
“When the market and outlook appear this dire, it's probably the right time for investors to check their preconceptions and take a really hard look for those pockets of deep value and unrivalled quality," Campbell said.
To own or not own US tech giants?
The strong performance of the 'Magnificent Seven' US tech giants – Apple, Amazon, Alphabet, Nvidia, Meta, Microsoft and Tesla – has been a blessing for equity returns and flows into US equities, “but on the other hand it is also a curse,” says Peter Garnry, head of equity strategy at Saxo Bank, “as it makes the US equity market more fragile”.
The S&P 500 has reached a relative level to the S&P 500 Equal Weight not seen since 2020, reflecting strong sentiment in technology stocks and more generally mega caps.
“The relative outperformance has also been stronger than in the past. As a result it makes sense to begin moderating expectations for these mega caps relative to the rest of the market,” said Garnry.
Many US small investors seem to have been doing just that, Bloomberg reported today, with retail investors "taking profits and selling riskier investments, as they ponder whether or not the handful of technology companies that have propelled major indexes can continue to prop up markets".
For small investors, said Russ Mould, investment director at AJ Bell, it still presents a "very difficult” choice.
Own the ‘Mag7’ right now “and you are in clover”, he said, but if you don’t own them already your performance is “suffering”.
“This is a particular challenge for pro investors, who are benchmarked quarterly and feel the pressure to pile in," he said.
For small private investors, it is less of an issue, or needs to be so, he said.
“Private investors must be wary of FOMO [fear of missing out] and ensure that if they do own the Mag7 they do so because they fit with their overall investment strategy, target returns, time horizon and appetite for risk,” Mould said.
What about the FTSE 100?
The FTSE 100 has largely missed out on November's gains, rising just 1.5%, leaving it roughly flat in the year to date.
As such, the 'Santa rally' is the last chance for it to join in the recent bullishness.
Stats back up this chance, with the FTSE 100 index in all near 40 years of its existence Santa rally resulted in an average gain of 2.2% in December, with the final month of the year seeing falls in just eight years.
This compares to only two other months (April and July) that average more than a 1% gain.
Looked at another way, the month has delivered positive total returns a convincing 76% of the time, said Jason Hollands at BestInvest.
He noted that Santa rallies in the UK have, on average, delivered slightly higher returns than those experienced by global equities, with the median monthly UK equity return during December being +1.7% over the last fifty-years compared to +1.4% for global equities.
There's not been a barnstorming Santa rally for the MSCI UK Index since 2017 and 2016 however, and none to touch those seen in 1987 (+9.7%) and in 1976 (+18.9%).
Why the Santa rally occurs is less clear, possibly ‘window-dressing’ by professional money managers, who could do with it during what has been a difficult year.
If there is a rally it won't be much of an indicator for 2024, says Mould, who noted that of the 11 negative years for the FTSE since 1984, ten came after a gain in December the previous year.
“If nothing else, that may back up Warren Buffett’s old aphorism that: ‘The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.’," Mould adds.
Hollands also has a word of caution, noting the finely balanced global outlook as economic growth is expected to slow as the lagged effect of aggressive interest rate rises bites.
"It is notable that most forecasters appear to be shying away from bold predictions for the year ahead," he said, with 2024 also bringing political uncertainties with a US Presidential election and a potential UK general election among many expected in the year.