Stockmarket’s Santa Claus rally is set to be dimmer in 2022

Shares usually shine brightest during December, but one key factor this year means Christmas may not be as sparkly.

December is historically the best month of the year for shares, but a traditional Santa Claus rally in 2022 appears increasingly unlikely.

Strong gains on the stockmarket since early October have left investors wondering how much higher Aussie shares can climb, despite a recent run of positive news for investors.

CommSec has analysed 70 years of growth in the All Ordinaries Index of 500 companies and found December’s average monthly gain is 2.1 per cent – triple the market’s overall monthly average of 0.7 per cent.

April was the next-best month, with a 1.9 per cent gain, followed by July and January, CommSec found. The worst months are September (down 1 per cent on average), June (down 0.2 per cent), February and November.

CommSec chief economist Craig James said the so-called Santa Claus rally during December could reflect people heading into the biggest annual holiday period and their optimism heading into a new year.

“The share market should be driven by earnings, expectations, and strength of management, but there are other factors that go into it – technical factors like charting, and there is also a degree of emotion around it,” he said.

Investors could see a weaker-than-usual Santa Claus rally on the stockmarket.

However, in 2022 there was “a bit of a complication” as Australian shares had a strong October and November after a disastrous September when they were down 6.7 per cent, Mr James said.

Livewire Markets spokesman Chris Conway said the strong rise on the ASX 200 from the October low was “nearly in a straight line”.

“It’s been a monster rally, and the question then becomes what’s left in the tank?” he said.

Shares climbed further this week amid good news on the inflation front in Australia and the US, but were unlikely to surge again as they had in the past two months, Mr Conway said.

He said the market could grind higher “but there is a huge resistance point 250 points above where we currently sit”.

“The comment will probably be Santa came early this year.”

CommSec had previously forecast the All Ordinaries index to be 7100 points by the end of 2022 and the S&P/ASX 200 at 6900. On Friday those indices were trading near 7500 and 7300.

“Our forecasts have been realised early,” Mr James said.

“In September we wouldn’t have given much chance of the forecasts being realised. Now we are not far away from record highs.”

Mr James said people should not assume the past was a good gauge for the future, and there were no guarantees with any investment.

“There is no substitute for doing your analysis of individual companies, the broader domestic economy, global influences as well as trends in interest rates and exchange rates,” he said.

“Eventually it all gets down to fundamentals.”

Investment bank Federated Hermes head of global equities Geir Lode said equity markets were indicating reasons for optimism although economic slumps were only just beginning.

“Though interest rate hikes seem to have achieved their goal of tempering inflation, we worry that higher borrowing costs and cost-of-living squeezes in major economies will lead to regional recessions in 2023,” he said.

“This will limit corporate earnings growth, potentially dampening further gains in the equity markets.”