And can trust investors benefit?

  • 05 December 2025
  • QuotedData
  • David Batchelor

The wreaths are up, and the mince pies are in the oven. And in the investment world too we have our own end-of-year traditions. Foremost amongst these is the “Santa rally”, specifically the old lore that the market invariably performs strongly over the festive period. But is it true? And if so, can trust investors benefit from this seasonal cheer?

Like so many aspects of modern Christmas, the theory of the Santa rally has its origins in America. Personally, I would prefer the more British-sounding Father Christmas rally, but I’m probably just being a Scrooge (or Grinch if you’re American). It was coined in 1972 by Yale Hirsch, founder of the annual Stock Trader’s Almanac, and refers specifically to the final five trading days in December and the first two in January. Since 1950, the S&P 500’s average return during this window has been 1.3%, with the index rising on three quarters of occasions – crucially, this positive hit rate is higher than for a randomly chosen seven-day period.

Nowadays, the term “Santa Rally” is used rather more loosely for any period of strong market performance during Advent, and there is plenty of evidence that the whole of December is generally a strong month for equities. And there is equally strong evidence of a Santa rally effect closer to home. December appears to be the best month of the year for UK equities, with the FTSE 100 delivering positive returns in 24 of the 30 years to 2023, versus 23 for the S&P 500 – although it must be noted that both markets fell over the month last year.

So if the Santa rally does seem to exist (just like the big man himself), what could be the cause? There are numerous hypotheses and there is clearly no one specific answer, but some or all of the following might play a part. Firstly, market volumes tend to be thinner at the end of the year, and if traders are feeling positive as the holidays approach, this can have an outsized impact on prices. Fund managers can also be tempted to “window-dress”, tidying up portfolios before year-end statements, which can mean adding to winners and driving prices higher, and closing out short positions.

This tendency to add to those stocks that have had a good run can also be driven by retail investors influenced by “year in review” pieces highlighting particular winners over the preceding months. Amongst professionals, asset allocation and risk committees slow down in December, which can lead to less appetite to sell into a market that is rising.

If the Santa rally effect is real, at least to an extent, how can investors in investment trusts benefit? The most obvious way is by just sitting tight and waiting for the positive year-end effect to be reflected in fund NAVs. Clearly, trusts with gearing should benefit most, as even a small rally of 1 or 2% is amplified. However, what could make trusts particular beneficiaries is what happens to discounts – opening a path to a possible double boost. For example, in 2023 there was some commentary on an “early Santa rally” coinciding with trust discounts narrowing from much wider levels. And if you manage to buy a trust on an unjustified discount at a time when risk appetite is beginning to improve, a positive year-end could see a mean-reversion of that discount come more quickly than would otherwise be expected.

There are plenty of examples of trusts that look oversold to us, perhaps too many for the Santa rally effect to have a meaningful impact on. That doesn’t mean that these bargains aren’t worth picking up now. Logic would suggest that in time, sanity will prevail (or, in a worst-case-scenario, we’ll see more liquidations).

Towards the end of the year, as is now tradition, QuotedData’s analyst team will be selecting its top picks for 2026 and we’ll also be explaining where we went right and wrong in 2025. Please look out for that.

Going back to Santa and his rally, perhaps the best that can be said for trust investors is to see it as a tailwind, not a strategy in itself. Banking on an unpredictable short-term move in markets is certainly no substitute for understanding the assets, governance, management and strategy of a trust. I have also written previously about the importance of “time in the market” over “timing the market” for investors, and that surely applies here. A strategy of buying and holding quality funds over numerous years is undoubtedly a better bet than trying to be too clever by half and taking advantage of short-term seasonal effects. Indeed, just like with the dogs in those old adverts, a good investment trust is for life (or at least the long term), not just for Christmas.