The FTSE 100 was launched on 3 January 1984, with a starting value of 1,000. Since then, the index has grown over six times, and is currently hovering around the 7,150-mark.
Why do I think the FTSE 100 could do well next month?
Based on an historical analysis of the index’s performance, December is the best performing month, with an average increase of 2.38%. This is nearly six times better than the overall average monthly return of 0.4%.
Only April comes close to beating December, with an average rise of 1.8%.
It is interesting to note that the two best December performances came in 2008 and 1987 — after some tumultuous events earlier in the year — when the FTSE 100 increased by 9.1% and 8.5%, respectively.
September 2008 saw the collapse of Lehman Brothers, which caused the index to have its third worst month on record.
On 20 October 1987, the Footsie fell by 12.2%, its biggest daily fall. This day is now known as Black Monday. During the course of the month, the index fell by 26%.
I wonder whether something similar will happen next month. Remember, the FTSE 100 fell by over 7% during the eight trading days following Russia’s invasion of Ukraine earlier this year.
Over the past 20 years, the FTSE 100 has fallen only four times in December. In fact, from 2003 to 2013, it increased every December. The last time the index fell in the month of Christmas was in 2018.
I am not sure why December has been such a good month for investors in the UK’s biggest companies.
It might be because there is an absence of economic data or policy decisions, which can cause the stock market to wobble. Since 1984, the Bank of England has changed interest rates 133 times, but only six took place in December. Of these, five were downwards movements and only one, in 1994, was an increase.
It could be due to fewer companies paying dividends during the month. When a share price goes ex-dividend, its price will generally fall, which will have an impact on the overall index.
Or, perhaps, investors have a general sense of optimism associated with the time of year. The last two weeks of December have been called the “Santa Rally”.
Trading volumes are also lower due to the Christmas holidays. A generally more optimistic cohort of investors may be able to drive the market higher than might otherwise be the case, when more typical trading volumes are experienced.
Whatever the reasons, it is clear that December is usually a good month for investors.
Am I going to invest?
So, based on my analysis, am I going to invest in, for example, a FTSE 100 tracker fund, for the month of December?
The short answer is, no. The past is not necessarily a good guide to the future. As a risk-averse investor, I always treat predictions based on historical trends with caution. I also invest for the long term. Trying to guess market movements from one month to the next can be risky.
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Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.