Santa baby, slip a rally under the tree, for me

Posted by & filed under Badger's Blog.

Every year I read about the Santa Rally; this is a period which “sees share prices fly higher than a sleigh in a snowstorm”.

Yet despite all the predictions and statistics I am not sure I have ever experienced such a thing. When I look at the figures, December seems to be a dull month often delivering flat returns.

But 2016 has delivered a few twists and turns, so could there be a final one to end the year?

Sliding doors

For those who have watched “Sliding Doors” it follows two story lines, effectively a “what if” scenario. For me, 2016 feels a bit like that.

At the start of the year the markets were in freefall. People scrabbled around for answers; with the slowdown in China and falling oil prices put in the frame; the reality was that it could have been a variety of factors. One thing we shouldn’t discount is that when markets fall, investors get nervous, and then they sell creating a vicious downward spiral.

After a helter skelter ride playing out over a few weeks, it seemed as quickly as the markets dropped they had bounced again by mid-February. We cannot underestimate the damage done in January with the portfolios down between 2.66% and 6.29% (by Mid-February they were down between 7.00% and 12.10%); we were facing a big headwind going into the rest of the year.

We knew about two key events – the vote to leave the EU, and the US Elections. It seemed that amongst all the uncertainty two things were certain.

As the UK geared up to vote on the future of our membership of the EU, many people suggested the end of 2016 could look like this:

  1. We would remain in the EU
  2. We would be preparing for interest rates to go up
  3. Cameron and Osborne would still be in office
  4. The UK would be doing okay(ish)

In the US, following the first black US President, we were going to see the first female President. We would also likely see (as the global markets settled from January’s tantrum) the Fed starting to raise rates (perhaps as many as four times during the year).

One other event played out during the year which is worth putting into the mix. Matteo Renzi called a referendum to make politics simpler; everyone would clearly vote for that considering all the political uncertainty in Italy.

We would have expected returns in low single digits, which would have been good, assuming everything played out as anticipated and that some unknown event didn’t knock things for six.

December 2016

Nothing is that simple; January was just the precursor for the year ahead, and where we sit today leaves me somewhat perplexed in terms of performance.

The EU referendum was complex; and whether we wanted to remain or leave making any decisions was not easy. Shortly before the vote I was told that it would come down to two things: economics and immigration.

The argument was that if sense prevailed, economics would win. Whether we believed the spin or not surely no-one would step into the unknown, particularly if there was a chance we could be worse off. The problem is that economics is not tangible but topics like immigration are.

If we feel threatened by an influx of people from Europe particularly when this is splashed across the press, then we are going to understand this particularly if we feel this is impacting our lives. Clearly this is a simplistic view, but it highlighted that the vote would come down to tangibles; that is why we voted to leave.

Logic says this is bad news but what has been surprising is that the UK is doing better than it would have done if we had voted to remain; a weak pound is good for exports and foreign investment. TATA Steel has now announced they will keep steel production in the UK; interest rates have fallen to historic lows and we have a new Prime Minister and Chancellor.

In summary coming to the end of 2016; the UK is doing well, and potentially could carry this through until our physical exit, what happens beyond that is anyone’s guess. But we are not in the habit of making long term predications as so much can happen in a couple years.

Once the vote to leave happened it seemed all bets were off. A Trump victory was not impossible. Despite the press doing their best to destroy him (and he helped them!) the momentum kept getting stronger and it seemed inevitable that Clinton was doomed.

Of course, there are reasons to be worried, his spat with China and Boeing are just examples of this but the reality is that he has put in place a top team around him. We won’t know the outcome but we never saw this coming!

As “populism” took hold it seemed obvious that Renzi had called the referendum at the wrong time. Imagine being offered a chance to free up politics and give momentum to growing your country creating wage growth and jobs. You would take it, but clearly the Italians didn’t see it that way, and used it to vote out Renzi. Consider this, he is their 63rd Prime Minister in 70 years!!!!

Whilst we seemed to be reeling from this what many seemed to miss was the Austrian Presidential election which pointed to a far-right candidate; Norbert Hofer, becoming the first fascist President in Austria since World War 2. In the end the vote went to the more liberal candidate. There will be some who view this with a sigh of relief but next year France, Germany and Holland all face similar challenges.

Sitting here in mid-December I think it would be very hard to have guessed this scenario and I haven’t mentioned China, ISIS and Oil!!! If we then put this against the headwind at the start of the year, I think if we could have delivered flat returns we would have taken that.

Bad news brings poor performance

In a normal year, this is true. The first six weeks of the year produced a big headwind and our view was that if we got to the end of year with low digit returns everyone would be happy. But just as we were recovering from January we got knocked down by the vote to leave the EU.

As we got to the end of June the portfolios were about flat, and there was some trepidation as to what would happen. As the pound weakened, overseas holdings turbo-charged returns and by the end of September returns were between 7.96% and 15.56%. In fact, only January was a negative month for the portfolios. The complete opposite to what we feared.

Then we got to November and Trump was elected. The markets (especially emerging) have been hit slightly and November was our first negative month since January, and yet the returns for the year were between 7.38% and 16.23%!

Coming into December there was no doubt about the result of Italian Referendum, the question was what impact this would have on the market. It did unnerve the markets initially but again not significantly; the portfolios are now sitting at between 8.16% and 16.57%.

Conclusion

This year has taught me many things but one thing has stuck out – nothing seems logical!

A continued wave of unexpected bad news would have in any previous year delivered negative, or flat, returns. If we had squeezed out flat returns we would have been delighted. But clearly the market has shrugged off the news.

As for a Santa Rally this year it could happen. It has been a strange year and on Wednesday the FTSE closed at 6,949.19, we could easily see this burst through 7,000 and challenge an all-time high. Statistically (apparently) since 1984 the FTSE 100 has risen 81% of the time in December with the last two weeks being the strongest. If the markets are already preparing for this then perhaps we might see a mythical Santa Rally in 2016 come true!

It has been a little weird this year and we trust that as we prepare the reports in January you will be pleased with the returns. We value you as clients, and we want to do the best for you. This means navigating through tricky times and we do appreciate your support over the years, and hope that we will be working with you for many years to come.

As for LWM well we will be setting off on our sleighs on Thursday 22 December and back on Tuesday 3 January. We as always will be available via email during this period so you can still contact us. 2016 has been an interesting year, 2017 is a New Year, whether it will be equally odd only time will tell!

Thank you for all your support and we wish you and your families a happy and peaceful Christmas and New Year.

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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