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This week: an update on the UK and an answer of sorts to whether the Santa rally really exists. But first, this is my last weekly note of the year. The truth is it has been a good year for equity and bond investors with all major equity markets up double digits and bond yields falling in the US and UK. Yields did climb in the Eurozone and Japan but this looks more like healthy normalization from what were still very low interest rate levels. Japan looks finally to be escaping decades of deflation and Germany is putting its foot on the fiscal accelerator. Yields rising because of a better growth outlook is generally good news. If you’d told me that this is where we would end up on 21 April this year (when the US S&P 500 was down -18% for the year in sterling terms) I’d have looked at you dumbfounded. But the S&P is now up 17% YTD (in dollars) which is in the 56th percentile of market returns. So, a pretty unremarkable year!
Indeed, in the spirit of positive surprises, there were some pretty solid economic numbers out of the UK this week. This surprised me given this data is looking back to the period around what was a noisy and uncertain UK budget. PMI survey data improved and both services and manufacturing are now above the 50 level that indicates expansion. At the same time, inflation came in below expectations (for the second month running) confirming the view that we might finally be heading back to the 2% target. Stagflation is rising inflation with falling growth. The UK looks to be in the opposite position. And, longer term, the new National Planning Policy Framework looks to be the first real pro-growth reform Labour has done.
The flies in the ointment are rising unemployment (both here and the US) and the fact that much of the UK growth has come from expansion of the public sector:
It is very hard to measure productivity growth for, say, a teacher, a policeman or a soldier. This means public sector productivity growth normally sits around zero. But better productivity growth is, ultimately, how we all get better off. Shrinking the private sector does not make this job easier.
Finally, I thought I’d end the year with some timeless lessons that are always worth keeping in your head as an investor. I am occasionally asked: will there be a Santa rally? This is, of course, a version of: is there such a thing as seasonality in equity returns? “Sell in May and go away” is another popular one. Let me answer this question in a roundabout way with some returns data (via Tony Pasquerillo at GS): if you had invested $1000 in the US S&P 500 in 1945 you would have, wait for it, $7,300,000 today. If that money was only invested from November to April you would have $462,000. If, alternatively, you just invested from May to October you would have $16,000. So yes, late December is seasonally a good period in the better 6 months of the year. But markets on average rise. And the only way to get that $7.3m is to stick with it even in the seasonally weaker periods of the year and let compounding work its magic. It turns out always believing in the Santa rally (even if it does not turn up) is probably the optimal investment strategy.
My next note will be my 2026 quarterly outlook piece. This is a deeper dive into our current positioning and a look at what 2026 might hold for investors. It’s therefore a bit longer than my usual weekly. For those not ready to read all that I would note that 79% of all years since 1945 have generated positive US equity returns. That’s roughly a 4 in 5 chance. For all the analysis and forecasts I’ll be reading and writing over the next couple of weeks there may not, ultimately, be much more to say about 2026 right now than that.
Finally, if you have made it this far, thank you! We at IPS thank you for your support and wish you all the best for the Christmas break and look forward to meeting as many of you as we can again in 2026.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
