As we approach the festive season, investors are busy sending RSVPs to office party invites and speculating whether the ASX will experience a “Christmas rally” this December. Historically, December has often been a favourable month for the ASX, with stock prices traditionally buoyed by the holiday spirit, positive investor sentiment, and increased consumer spending. However, the question remains whether the current global economic climate will align with this historical trend.
Over the last decade, the ASX has experienced a Christmas rally in eight of the past ten years, indicating a statistical likelihood of 80%. According to historical data, the benchmark ASX 200 index has seen an average gain of about 2.2% during December. The strongest performance was observed in 2020, when the ASX 200 surged by 4.5%, driven by vaccine optimism and a resurgence in consumer and business confidence after the initial shock of the COVID-19 pandemic. In contrast, the only significant December declines in recent years were in 2018 and 2022, where the index fell by 0.8% and 2.7%, respectively. These downturns were largely attributed to escalating trade tensions between the US and China in 2018 and fears of a looming recession due to aggressive interest rate hikes in 2022.
Several factors contribute to a Christmas rally. Firstly, the year-end often brings a surge in buying activity as institutional investors adjust their portfolios ready for the new year. Additionally, the holiday season typically boosts consumer spending, which can have a positive impact on retail and related stocks. Investor sentiment is also generally more optimistic during this time, influenced by the so-called “Santa Claus rally” – a phenomenon where stock markets tend to perform well during the last week of December and the first two trading days of January.
Another contributing factor is the influx of dividend reinvestments, as many of Australia’s top companies and numerous interest rate securities pay out in December, leading to reinvestment into stocks. However, these rallies are not guaranteed. External macroeconomic conditions, such as inflation rates, interest rate policies, and geopolitical tensions, can significantly influence market performance. This December, there is the spectre of looming US tariffs that may weigh on the market.
When comparing December performance of the ASX to other global markets, particularly the US, there are some similarities and notable differences. The US stock market, particularly the S&P 500, has shown a December rally in nine out of the last ten years, with an average gain of around 1.8%. The performance of the US market is often driven by similar factors, such as consumer spending, but is also influenced heavily by the Federal Reserve’s policy decisions and broader economic indicators. In contrast, the ASX tends to be more sensitive to developments in the Chinese economy, given Australia’s strong trade ties with China.
European markets have seen more variability in December, particularly due to the region’s exposure to political uncertainties, such as Brexit and recent geopolitical tensions in Eastern Europe. While Australia is somewhat insulated from these factors, the ASX is not immune to global market shifts, especially when it comes to commodities and resources, which form a significant portion of the Australian market.
Heading into December 2024, the global economic environment presents a mixed picture for the ASX. On the positive side, inflation appears to be moderating in many parts of the world, which could reduce the pressure on central banks to further tighten monetary policy. The Reserve Bank of Australia (RBA) has indicated a more cautious approach to interest rate changes (up or down), which may support investor confidence. Furthermore, Australia’s strong labour market and stable consumer spending levels are positive indicators that could help fuel a year-end rally.
However, there are also headwinds to consider. Geopolitical tensions, particularly conflict in the Middle East and the impending US tariff deployment, particularly against China, continue to create uncertainty in global markets. Additionally, concerns over a potential economic slowdown in major economies like the US and Europe could weigh on investor sentiment. The ongoing impact of high global debt levels and uncertainty about China’s economic recovery are also factors that could temper enthusiasm in the ASX.
Given the historical trends and current market conditions, there is cautious optimism for a Christmas rally on the ASX this December. The historical probability of a positive December performance on the ASX is strong, and the easing of inflationary pressures combined with a more dovish RBA stance provides a favourable backdrop. However, investors should remain vigilant of potential risks from global economic slowdowns and geopolitical tensions, which could impact market sentiment.
In summary, while history suggests a likelihood of a Christmas rally on the ASX, market performance will ultimately depend on a delicate balance of domestic economic resilience and the influence of global economic and political factors. Investors looking to capitalise on a potential rally should go easy on the eggnog and keep a close eye on key indicators, such as RBA announcements and global economic data, to safely and effectively navigate the final month of 2024.
Photo by Heidi Fin
