We are in the final four weeks of 2019 and the stage is set for a rally to finish off the year. This is a festive tradition that spans across the world. Although more prevalent in the U.S, it presumes that the stock markets start to fly as the year ends. History suggests it’s real, with a rally happening in 25 of the past 30 years and we’re starting to feel the Santa Rally buzz here in Nigeria.
This may be attributed to the positive money flows in the last few weeks of December and the first few weeks of January. This is no doubt one of the excellent months to stay invested in the stock market for the year 2019.
A walk Down Memory Lane
The Santa Claus rally first became a thing in 1972 when Yale Hirsch recorded it in his Stock Trader’s Almanac. He described it as a calendar year effect which involves a rise in stock prices during the last 5 trading days in December and the first 2 trading days in the following January. Yale Hirsch noticed a seasonal behavioral change in investors which led to a spiral of events – increased year-end bonuses led to increased consumer spending which caused a gain in stock performance which made investors scramble for the wave putting more money back in companies who then increased bonus payouts.
Why the Santa Rally?
There are no universally accepted reasons for the rally although a few elements, ranging from pure emotion to deep analysis – can be said to contribute to it. This statistically proven phenomenon occurs when markets put on a festive front ahead of the holiday period.
Some have pinned it on a combination of festive cheer and annual bonuses. You could also make the case that the Santa Rally is almost a self-fulfilling prophecy as investors anticipate it and try to get in ahead of everyone else unless something major prevents it.
The rally is sometimes attributed to the following:
- Increased investor purchases in anticipation of the January effect
- Lighter volume due to holiday vacations makes it easier to move the market higher
- Short sellers / pessimistic investors tend to take vacations around the holidays
- The general Holiday spirit sees people pumping money into the market.
While history offers enough evidence that stock prices will always defy predictions, there’s an observable seasonality to markets.
Does the Santa Rally always occur? General Outlook
As the saying goes, lightning does not strike twice in the same place, which should signify a positive rally in 2019. Statistically speaking, the chances of riding a rally is high. More than two-thirds (78%) of the Decembers dating back to the 1960s have resulted in positive gains for shareholders. Santa predicts the S&P 500 will grow another 3% before the year-end 2019 as compensation for the 9% tumble in December 2018.
What does the Santa Rally mean for the Nigerian Market?
Although Nigeria’s economy has grappled with low growth since recovery from recession four years ago, there is an air of optimism especially in an emerging market such as the Nigerian Stock market with over one hundred and eighty quoted companies covering different sectors.
Data from the National Bureau of Statistics (NBS) shows Nigeria’s gross domestic product (GDP) grew by 2.28% in the third quarter of 2019. According to them, the extension of credit by banks is expected to entice consumers and investors to increase consumption and buying equities as they spend more this season. Banks have also started rallying, so we expect to end the year with a firework show.
Nigerian stocks rose to four-week high as 5 banks’ share prices rallied in November. Investors sent a strong signal that the market may be ending on a highly bullish note at the end of the year.
As of 22nd November 2019:
- Access bank gained 36.73% MoM and the year-to-date figure stood at 47.79%
- FCMB gained 30.62% MoM to close at N2.09 with 10.58% YTD
- UBA reported impressive gains as investors gained 31.58% MoM
- GTBank gained 11.79%, MoM
- FBNH, the oldest of the FUGAZ Bank also gained 41.51% MoM
These results are suggesting there may be a significant upside for a sustained bullish rally.
Are Stock Dividends higher than T-bill Yields?
The dividend yield of banking stocks is arguably higher than T-Bill yields. This is because the OMO market has been blocked off to local investors, hence, local corporates and individuals looking to invest their funds have only the NTB market to turn to where yields are currently too low and unattractive. In order to look for more profitable opportunities, they may look to the equities market, particularly stocks with high dividend yields like some banking stocks, e.g. Zenith, Stanbic, GTB, Etc.
Wealth.ng offers you an optimum selection of stocks trading on the Nigerian Stock Exchange. You can invest in dividend-yielding stocks, with high liquidity to achieve the right balance of risk and returns on your portfolio. So, if you’re aiming to get your finances on track, your slice awaits you.
For an investor looking to hold something for the long term, it makes equities relatively attractive because it carries a higher value now.
Final Note
Investing is a long-term game, and Christmas comes but once a year. With stock performance at the very end of the year, there is often more at stake than just feeling good around the holidays. It is important that you formulate your investing or trading strategy and take sound advice from financial advisors to minimize risk and maximize profits.
How about investors selling off some of their holdings to meet family Christmas obligations as well as prep for kids’ school fees in January. So, I expect the market to tank a bit during this yuletide and New year instead, especially with the overall below par performance of the NGSE and the Nigerian economy in 2019. However, I also expect the rally your article predicted to begin towards the 3rd and 4th weeks of Jan 2020 when most of the expenses I highlighted above have gone by.