The end of the year is a time for reflecting on the progress we’ve made in the preceding 12 months and predicting how we think the next year will pan out. The festive season and new year provide some useful pointers as to how the markets might behave in 2018.
As we approach the end of 2017, investors are starting to ask whether this year we’ll see the famed and fabled ‘Santa Claus rally’. It’s a spell at the end of the year which is characterised by a strong stock market performance over the Christmas and New Year period. There have been years when it has failed to materialise (recently, in 1990, 1999, 2004, 2007 and 2014), remaining as elusive as its Lapland-dwelling namesake.
However, Schroders released some data last week showing that the FTSE 100 has been more likely to rise in December than any other month over the last 30 years, rising by an average of 2.4%. The FTSE 100 has also risen in December 83.3% of the time. Schroders also found that world stock markets were more likely to rise in December than any other month. There’s much speculation on why this happens with a Schroders spokesman suggesting: “There is, perhaps, more goodwill cheer in the markets due to the holiday season putting investors in a positive mood, which drives more buying than selling. Another view is that fund managers, which account for a substantial part of share ownership, are re-balancing portfolios ahead of the year-end.”
Despite these positive pointers, there are fears among some commentators that the markets won’t benefit from this festive bounce in 2017. Lack of certainty around Brexit and a chequered economic backdrop could mean that the markets remain devoid of Christmas spirit, with the risk that the negative sentiment will tip over into the beginning of 2018. If there is no Santa Claus rally this year and Brexit turns out to be the cause, it at least shows us that this is a topic that’s weighing heavily on the minds of investors and sets expectations for what could become a tricky year.
High street versus online
A Christmas boost would also be welcomed by UK retailers. In October, consumer spending was down 2%, which was the fastest year-on-year decline in four years according to Visa. It was the fifth monthly decline in six months and there was a 5% decline in spending on the high street. This hasn’t been helped by a drop in real wages in recent months as pay rises lag behind inflation. Wage growth fell below inflation in February of this year – the last time this occurred was August 2014. High Street confidence is being hit as all this could add up to have a negative impact on the Christmas spend.
The competition between traditional high street retailers and their online-only counterparts continues to dominate the sector. So, the questions retailers and investors with an eye on the retail sector will be asking is not only over whether people will be spending money this Christmas but, if they do, will it be online or on the high street?
This year’s Black Friday saw online retailers attract the bulk of the spending. Overall retail sales increased, but fewer shoppers than last year made it to the high street stores on the day. Perhaps not unrelated was that it fell in the same week as the Chancellor’s new Autumn Budget, with his gloomy growth forecasts possibly increasing consumer caution. The two relatively new marketing promotions of Black Friday and Cyber Monday bookmarking either side of the weekend aim to generate a four-day shopping bonanza to kick-start Christmas spending. Encouraging Christmas sales earlier in the season could have a negative impact on consumer spending nearer the actual festivities, reducing the last-minute retail rush.
A certain type of online retailer is reaping the big rewards from the migration to online buying. Amazon is the leviathan straddling this sector and its share value has continued its rise this year. Following news that Black Friday sales were up 18.4% on last year, the share price rose by 3.4% to a record high of $1,195.83. Companies like Asos and Boohoo provide further examples. Their sales numbers may have slowed recently but they have shown phenomenal growth over the last 12–18 months. Valuations of these businesses are extremely high and are a measure of their rapid and impressive online success.
While online retailers have flourished, trading has been harder for the traditional high street names. When footfall is down and people aren’t hitting the high streets like they once were, old favourites like Marks & Spencer’s and Debenhams could struggle. And as we know, a number of long-established, seemingly permanent fixtures have disappeared from our high streets completely in the last decade. Retailers are starting to demand a different type of service. They expect to be able to make an order and for their products to be delivered to an address of their choice, sometimes within a matter of hours. This is having an impact on the valuation of businesses beyond the retail sector. The logistics and delivery company sector has expanded dramatically in recent years to cope with this increased demand.
A broader barometer
We won’t know how the retail sector has performed until the data comes through in January but however the festive season in the retail sector pans out, it’s often seen as a barometer for the forecast for other sectors. If we witness a dramatic fall in consumer spending, not only does it negatively impact the retailers, but also the leisure sector and the wider economy. Consumer behaviour provides a reliable reading of what the average person on the street is thinking, which in turn can be a useful predictor of investor behaviour. Retail is not a particularly large sector or a big driver of markets but over the festive season it gives us a feel for which way the market might move.
Time will tell whether Santa Claus will pay the markets a visit this year or if the ongoing Brexit negotiations and the broader political and economic outlook will overshadow festive spending and sentiment. Whether the impact is naughty or nice for investors, if you would like some help in managing your assets in 2018, please get in touch.
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This article does not constitute investment advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your Investment Manager to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
