As we approach the end of yet another year, the year-end rally often takes the center stage. This is the time when investors and market players make strategic moves.
Traditionally, several factors contribute to the rally, one of which is portfolio rebalancing. As the year concludes, institutional investors and fund managers often adjust the weightings of their assets through a process of buying and selling of stocks, which positively impacts its prices.
This is also the season when fund managers often participate in “window dressing” their portfolios, which involves showcasing high-performing assets to create an attractive year-end report to clients and promote their funds.
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During this holiday break, trading volumes typically decrease as many market participants take their time off, leading to lower liquidity. This, in turn, can amplify market movements and contribute to higher stock prices.
Historically, the stock market tends to rally in the last five trading days of the year, which usually spills over into the first two weeks of the new year.
If we look back over the past 39 years since 1985, the Philippine Stock Exchange (PSE) index has consistently closed the year on a positive note in 74.3 percent of instances, with an average gain of 2.8 percent. This positive momentum often extends into the first two weeks of January, resulting in an additional average return of 3.3 percent.
In other words, if you buy one day before the five-day countdown begins — which, in this case, is on Dec. 18 — you could potentially achieve a total return of 6.1 percent by holding your investments until the 10th trading day of January 2025.
While this recurring phenomenon appears to be a reliable market behavior, it is important to note that historical patterns are not foolproof predictors, and market dynamics can evolve. The potential strength of a year-end rally is often intertwined with market sentiment.
In fact, the probability of a Santa Claus rally over the years has been declining. In 2013, the likelihood was high at 86 percent, based on its historical performance since 1985. However, this probability gradually decreased to 81 percent in 2017 and further to 79 percent by 2019. This year, the probability dips even lower to 74.3 percent.
The other way to look at it is to examine the occurrence of a Santa Claus rally over a more recent timeframe, focusing on its performance from the past five years.
Before the onset of the pandemic in 2020, the probability of a Santa Claus rally had consistently stood at 80 percent since 2016. However, during the challenges of 2020, this probability declined to three out of five years, or 60 percent. By 2021, it sank even lower to 40 percent — a trend that persisted through 2023.
Last year, the PSE Index closed lower on the last five trading days of 2023 by 1.07 percent. But this negative trend reversed in the first ten trading days of January of 2024, resulting in a net gain of 2.4 percent.
Following this historical trend, the likelihood of a Santa Claus rally occurring this month seems relatively slim, given the current prevailing negative market sentiment. Even if one were to materialize, it could potentially be a weak rally stemming from a substantial sell-off in the market.
Nevertheless, despite this scenario, there are stocks that tend to be seasonally strong at the end of each year, which could present potential opportunities.
If we examine the historical performance of PSE index stocks over the past five years, from 2018 to 2023, we would find one stock, BPI, that has consistently registered positive returns 100 percent of the time during the last five days of the year, with an average return of 1.57 percent.
Even when we look at the stock’s performance since 2009, BPI also has registered a positive return in 12 of the past 14 years, or 85.7 percent of the time, with an average return of 2.53 percent.
There are only two stocks that have registered positive returns in four of the past five years, or 80 percent of the time. These are ICTSI and DMCI Holdings. Again, if we look at the past 14 years, these two stocks also had a high 78.5 percent probability of rallying.
It’s worth noting that while some stocks that performed well in December may experience profit-taking, those that underperformed may attempt to catch up in January.
Although trading based on these historical trends can be profitable, it’s important to remember that the strength of the rally will ultimately depend on how investors perceive the stocks’ potential performance in the New Year.
As the year draws to a close, it’s important to stay vigilant and acknowledge potential risks. External shocks, unexpected economic downturns or adverse geopolitical events can disrupt any anticipated rally.
As the holiday season approaches, let us take our well-deserved break. It is an opportune time to reflect on this year’s investments, evaluate our past decisions, learn from our mistakes and use these insights to become better investors next year.
Henry Ong is a Registered Financial Planner of RFP Philippines. Stock data and tools provided by First Metro Securities. To learn more about investment planning, attend teh 109th batch of the RFP Program this January 2025. To register, e-mail info@rfp.ph