Santa Claus is coming to town

With the festive season upon us, it doesn’t matter where you go – you will be greeted by colourful flashing lights and Christmas decorations. And of course, no festive season would be complete without the cheerful Christmas songs, especially one of my favourites: Santa Claus is coming to town.   

I particularly love the lyrics: “You better watch out, you better not cry, better not pout, I’m telling you why, Santa Claus is coming to town.” The rest of the lyrics serve as a fair warning that if you have been naughty or unprepared for Santa’s arrival, you will not be getting any gifts this Christmas.

And, standing in a shopping mall surrounded by festive decorations, it struck me – these lyrics suit the JSE just perfectly. People are always looking for reasons why the market is moving up or down, and they often overlook the biggest reason: the holiday spirit.  

When we take a look at the JSE All Share Index, only 16 (32%) out of the last 50 Decembers were negative months. The FTSE/JSE All Share Index has grown by 13% per year since 1965, and more than a quarter of this growth (26%) was achieved during Decembers alone.    

Just as with ordinary historical figures, figures produced during Christmas months by no means hold any guarantees for future performance, and I’m fully aware of the fact that our current investment environment, paired with great political unrest in South Africa, Brexit and Trump to name but a few, will pose its fair share of difficulties for our local stock market to end on a positive note this year.

I also know that Santa Claus’s sleigh is rapidly rushing towards us, and although the FTSE/JSE All Share Index was still negative at the time of writing this column (16 November), I definitely won’t risk standing in its way by guessing that the market will close on a negative note this December.  

As positive as historical December data over the last 50 years may seem, things become quite interesting when you view these months in isolation over this period. Despite the fact that December was positive 68% of the time, it was the worst performer in a rolling 12-month period (i.e. from one December to the next).

If you had bought shares in June every year, your rolling 12-month returns would have been the best. And it just so happens that May, the month during which most stockbrokers are instructed to sell according to the old saying, produced the second-best rolling 12-month returns. 

From a statistical point of view, however, Decembers do appear to be positive months, and I wouldn’t declare the market’s recent decline a trend that is likely to flow into December. The fact remains that we still find ourselves in a very risky investment environment and these risks cannot be ignored.

The market’s current price-to-earnings ratio (P/E) of 21.4 times is still on the more expensive side when compared to the 20-year average of 14.9, and it’s not looking great on an international level either. Despite its negative growth over the past 18 months, the FTSE/JSE All Share Index was still up by 76% over the past five years.

Take the necessary precautions to ensure that Dr Seuss’s Grinch doesn’t steal all your profits in the event of another downgrade. Play it safe and be prepared, because Santa Claus is coming to town in a mere four weeks.

Schalk Louw is a portfolio manager at PSG Wealth.

This article originally appeared in the 1 December edition of finweek. Buy and download the magazine here.