What's next for stock markets: Will there be a Santa rally this year?

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Past performance is not a guide to the future. Investments can fall as well as rise in value, so you could get back less than you invest.

Full podcast episode transcript

[0:10] Emma Wall: Hello and welcome to the Switch Your Money On podcast with Hargreaves Lansdown. I’m Emma Wall – Chief Investment Strategist.

[0:16] Sarah Coles: And I’m Sarah Coles – Head of Personal Finance.

So, the markets have had a few things to contend with in the past couple of weeks – not least the UK Budget. So, this week, we thought we’d take a brief look at how they’re fairing now the dust has settled.

So, it’s really good opportunity to look ahead a bit as well – for December – and explore a kind of market pattern that’s become a bit of market folklore – so that’s the Santa Rally in December.

So, we should start – I suppose, Emma – with how the markets reacted to the Budget now that the immediate reaction has finished. How are things looking now?

[0:46] Emma Walls: Well, firstly, a apology to our listeners because they well be completely bored of the Budget by this point. But this is why it is still important – because what happens is, on the day of the Budget, the market reacts quite quickly to what the Chancellor says in the Speech – but, in the days that follow... that’s when they get into the small print – the stuff that perhaps was hidden – or, inadvertently, not shared – and it gives the market – by which, I mean the bond market, the pound, the equity market – groups, such as the CBI – so business groups – time to really digest, actually, what was in the Budget – and that is reflected in valuations, prices, and sentiment – which is why it’s always worth taking a litmus test a few days after. And the immediate sanguine positivity on the day – you know, the pound went up, bond yields came down, the FTSE 100 came up... Actually, in the days after, some of that positivity unravelled, as businesses got into the nitty-gritty of the fact that there weren’t very many policies in there which were pro-growth – and we saw that in the softening of the pound as well.

As I say, in the immediate aftermath of the speech, the pound rallied – but, actually, in the couple of days following, the pound fell – and that seems to indicate, actually, the pound is a barometer of long-term growth potential – and that seems to be saying that, actually, this is not a pro-growth budget – and this actually means that the forecasts for growth in the UK perhaps aren’t quite as optimistic as the pound’s valuation, on the day, initially suggested.

[2:16] Sarah Coles: And – in terms of how the markets look into this over the following days – is sentiment important? Is it how things are reported – and how people are feeling about the Budget – as well as all the details? Does that really affect the markets?

[2:29] Emma Wall: It depends whose sentiment.

So, if you’re looking at big investment banks – global investment banks – their sentiment matters. So, if you have a look at some of the forecasting that came out in the days following the Budget, for example... you know, there were strategists coming out, saying, actually, they expect sterling to depreciate – there’s one from Eurizon... things like the CBI – or other big business groups who represent British industry – big businesses who are big employers. You’ve seen sentiment from former CEOs of some of our largest employers – such as Sainsbury’s – come out and say negative things about the Budget and the Chancellor’s position.

So, there is certain sentiment when it comes to large employers, business groups, trade bodies, investment banks – which really do matter to the market.

[3:15] Sarah Coles: We’re still talking about the Budget – d’you think we’re still gonna be talking about it in the weeks to come? D’you think it’s still going to dominate, or d’you think the markets are gonna be able to move on from this?

[3:23] Emma Wall: I think it depends on a couple of things.

So, there are certain sectors who are saying, actually, the sentiment depression – not just during a budget, but actually in the run up to the budget – has affected their results – and will affect their results this quarter – so Q4 – the three months to the end of the calendar year.

I think, if we find that a number of businesses... and I’m hazarding a guess here – but, for example, retailers, housebuilders – those in leisure and entertainment. If we find that their results for the fourth quarter are worse than they were in previous years – and that they blame the Budget – or the Budget speculation, pre-Budget – then I expect that we will continue to talk about it.

If that’s not the case, then I hope, very much, that we’ll fall into a normal economic cycle and we don’t start talking about the Budget until September next year.

[4:15] Sarah Coles: [Laughs] Yes – exactly! And, I suppose, when we’re looking ahead to that ‘Golden Quarter’ for the businesses – and, presumably, an early marker is how Black Friday has gone. So, was there some positives in there?

[4:25] Emma Wall: So, it’s called ‘Golden Quarter’ because you have Black Friday, Thanksgiving... you often have some religious festivals – such as Diwali – falling within this period – and, obviously, you have Christmas. And it’s a period where people are gifting, they are spending money, they are going out to celebrate – so things like restaurant revenues – obviously, present-buying – but also travel gets a boost in this last three months of the year – hence the ‘Golden Quarter.’

And, actually, there’s been some early indicators from Black Friday, at least, that it’s not going to be as positive as hoped. So, this is information that’s coming out of America – but, obviously, America does dominate when it comes to commerce and ecommerce.

There was data out from the National Retail Federation – and also from Deloitte – which showed that, although there were a record number of people pounding the streets – if you were. So, buying things – either the literal streets – or the figurative ones, online... actually, the average spend was down. And so, this speaks to the ongoing cost-of-living pressures that people are under – the fact that inflation is still, on both sides of the pond, above target rate – the fact that interest rates are higher. So, people who are buying on credit... there will be bigger payback for making those purchases. And just, in general, sentiment is not as positive as it has been when it comes to consumers.

Again, this is particularly true in the US. We’re beginning to see early indicators of a jobs market which have quite mixed data - impact, for example, of some of the immigration clampdown in the US beginning to flow through to Real Economy Data.

So, early indications suggest that Black Friday has not been a roaring success – and what that could, potentially, mean for the rest of the Golden Quarter will remain to be seen – but, if the trajectory continues, that’s not just bad news for those retailers – those providers of leisure, restaurants, travel – it’s also quite bad news for the US economy. ‘Cause the US economy is one that’s very much fuelled by consumption – by US consumers and households going out and spending money – and that’s very much propped up the US economy in the past and made it as robust as it is today – and, without that, that could have a negative impact on US GDP.

[6:36] Sarah Coles: And, I suppose, in this particular Black-Friday Golden period, the US is actually also dealing with the impact of tariffs on the prices – and that, presumably, will have a bit of a dragging effect on people’s enthusiasm for shopping.

[6:47] Emma Wall: Absolutely. There are early signs that the tariffs have had an impact on inflation – it is what’s making inflation more sticky – and, therefore, that will impact – as you say – consumer sentiment.

[6:56] Sarah Coles: If we talk about inflation for a bit – and interest rates... presumably, we’ve got some big announcements for the UK and the US in December. Where are the expectations for that at the moment?

[7:04] Emma Wall: Well, they swing, Sarah! [Laughs] I mean, every week, there seems to be a new sentiment driving, particularly, US markets when it comes to interest rates.

So, if we take ourselves back a couple of weeks to when, actually, the US was emerging from economic shutdown... We were told that the data was not collected for October for either jobs or inflation – and there was a significant market shock in terms of what that would mean for the Federal Reserve’s ability to make a decision. Because they’re such a data-based organisation, not having the two key pieces of data which go into their decision-making on interest rates – when the market very much expected rates to hold – and so risk assets, equities sold off. Then, just a week later, one of the Fed members came out and said, actually, he did think that they would be able to make a decision – and, indeed, indicated that he, at least, would be open to the concept of a cut – and markets rallied again.

So, the data and the sentiment is very mixed, but consensus seems to say that we will have a cut from the Federal Reserve in December. In terms of what we can expect in the UK... a few key pieces of information we needed in order to make a prediction on UK rates. We had jobs data – and that seems supportive of a cut. We had inflation data – and, although inflation is sticky, it is downward-trending, and that seems supportive of a cut.

The third piece of information we were waiting for was the Budget – because, if there had been inflationary measures in the Budget – such as a rise in Income Tax, or VAT – or even measures that weren’t deflationary... that would mean that the Bank of England would be looking not just at inflation today, but the potential for further inflation in the future, and they would be more likely to hold.

As we didn’t have a particularly inflationary Budget, the expectation is that the Bank of England would be cutting in December as well.

[8:57] Sarah Coles: Yes – there was awful lot in the Budget. I think some of those frozen prices will definitely help to keep prices down – I think, particularly, the frozen travel, for example – the rail fares, and the bus fares, and prescriptions. I think there’s more of a limit to inflation from the Budget than there was an inflationary impact – so it does look, very much, like there might be this UK cut in December.

So, one of the things we started off talking about in this podcast is the ‘Santa Rally’ – and how markets do in December. Can you just explain what the ‘Santa Rally’ actually is?

[9:24] Emma Wall: Well, ‘Santa Rally’ is the idea that December is often a strong month for markets – and, therefore, that you get this sort of ‘Philip’ at the end of the year – this positive sentiment which drives markets higher in December. And, actually, statistically, it does happen more often than not – and there are a couple of reason why this may be... One may be the effect of the holidays.

Literally – as we were talking about in the ‘Golden Quarter’ – there is a euphoria that goes [laughs] around this time of year. Quite often, in America, the financial year runs the calendar year – and you can quite often get indications or stronger indications of how the financial year has done – which can be positive. So, it’s availability of data, a euphoria around festivities – and there’s also some element of liquidity involved.

Now, this is less so now because we’re all able to trade far more easily – but, previously, there would be fewer players in the market – because people were, literally, not at work – and so, actually, it was easier for momentum to build because of the fewer buyers and sellers in the market... just because of the nature of the market makeup.

As I say, that’s less so the case now because we have high-frequency trading with algorithmic trading. We have people with mobile phones, who are always on and able to trade – even when they, technically, should be on holiday – unless, of course, the market is closed.

But those are some of the reasons why you have a positive December. Also, an election year – don’t forget – in the US... the election’s, obviously, always in November – and, if you get a President who is deemed to be positive for markets, you might see a particular rally following that election – as, indeed, we did see, initially, with the election of Donald Trump.

[11:00] Sarah Coles: And, I suppose, there must be an element by which this is a self-fulfilling prophecy – that, if people are expecting markets to rise, then they behave in a way that makes markets rise.

[11:07] Emma Wall: Yes, absolutely – there is momentum, as people believe in the positivity of the data. You look for datapoints and indications with the confirmation bias – if you will.

That said – if we get negative macro sentiment – it is macro, very much, which has driven market activity this year... I do think any euphoria at the prospect of Santa Claus – or Father Christmas – coming to visit will be quashed with a Federal Reserve choosing to hold interest rates.

[11:36] Sarah Coles: So, I’m gonna ask you the impossible question now. On balance, d’you think we’ll have a Santa Rally, or d’you think the jury’s out on this one?

[11:43] Emma Wall: I think there’ll be a lot of volatility for the final month of the year. Looking at – as we speak – on the 1^st of the month, when trading’s only been open in Europe for a couple of hours – it’s not looking positive – but I expect it to be a volatile month – and I expect us to end, reasonably, where we are – or where we are abouts. Because I say the Federal Reserve decision to cut rates is pretty much priced in – so I don’t think we’ll be experiencing a significant rally over the next month. I think we’ll have some volatility – I don’t think we’ll experience a significant downturn in the last month either.

[12:15] Sarah Coles: Yeah – I think maybe some festive cheer’s gonna be a bit thin on the ground, given everything else that’s going on.

Well, thanks very much for all of that – it’s really interesting to get a picture of what we can expect in the coming months.

So, that’s all from us this week – but, before we go, I do want to throw my horrible stat of the week at you – which I always like to do. So, my question’s actually around the Santa Rally – ‘cause, obviously, I dug into it a little bit more – and I found out where it came from.

So, when was the phrase ‘Santa Rally’ coined?

Was it 1992, 1982, or 1972?

[12:45] Emma Wall: 1972 feels like too long ago – and the ‘80s was rather mixed for markets – so I’m going with 1992.

[12:54] Sarah Coles: Great reasons, but the wrong answer, sadly!

[12:56] Emma Wall: [Laughs]

[12:57] Sarah Coles: So, [laughs] it was actually – believe it or not – 1972. So, it was actually in the snappily-named ‘Stock Trader’s Almanac.’ It, officially, actually, just referred to that trading period between Christmas and New Year – but, actually, over time, it’s broadened out to cover all of December – and, I guess, much in the way that Christmas has done the same sort of thing.

[13:12] Emma Wall: I think my aversion to the word ‘Santa’ is the reason why I got that wrong.

[13:17] Sarah Coles: [Laughs] Oh, well, unfortunately, even though mentions of the Budget might go over the next month or so, I do think mentions of the word ‘Santa’ might increase!

[13:26] Emma Wall: ‘Father Christmas’ all the way!

[13:28] Sarah Coles: [Laughs] Well, before we go, we should say this was recorded on December 1^st 2025, and all information was correct at the time of recording.

[13:35] Emma Wall: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you. Investments rise and fall in value, so you could get back less than you invest – and past performance is not a guide to the future.

[13:45] Sarah Coles: So, all that’s left is for us to thank our Producer, Elizabeth Hotson.

[13:48] Emma Wall: And to say thank you to you, so much, for listening – we’ll be back again soon. Goodbye!

[13:52] Sarah Coles: Goodbye!