Fear and greed; two drivers of investor behaviour

Will we get a Santa rally?

It’s not unusual for equity markets to be strong in the run up to the end of the year, often called a Santa rally by investors. It can come about for a number of reasons, such as fund managers wanting to have their portfolios fully invested by the end of the year, chasing returns prior to 31 December valuations, Christmas bonuses being invested or maybe just seasonal optimism.

It is probably less likely to happen at the end of a year when stock markets have been strong as they have so far this year, in fact very strong this year, particularly given the huge challenges that have been faced. We have had the upheaval of trade tariffs, weak economies, strong inflation, interest rates not falling as fast as expected and geo-political tensions and conflicts. The list could be longer, but nonetheless equity markets have, in general, provided fantastic returns.

Over the last 3 months, or so, there has been a clear trend across different types of assets which has seen investors buying the same things over and over again. Within equity markets that has, to a large extent resulted in the share prices of companies that are seen as being beneficiaries of the growth in AI doing very well, although this has spread out to many related companies also doing well, for example US energy companies. It has become known as the “momentum trade”, meaning investors have just kept buying what has been going up. It has spread even wider, with gold maybe being the best example of that.

Gold price (USD) over 1 year to 17 October 2025

Source Bloomberg 26.09.2024 to 17.10.2025. The performance information presented in this document relates to the past. Past performance is not a reliable indicator of future returns.

So, will we see this carry on, will we get that Santa rally? That’s the key question we are asking ourselves at present.

I think there is a pretty good chance that we will. Investors in equity markets are feeling buoyant, they have done well this year and are, to a large extent, putting the considerable challenges we face to the back of their minds. Not least, that many regional markets are near all-time highs and valuations look expensive by long term historical comparison.

Or will the Grinch win out?

Maybe it’s my natural reticence to get too excited about markets going up, which, I think anyway, is driven by disliking losing money, more than taking pleasure out of making money. But, that’s enough about my personality traits.

Anyway, the challenges faced by financial markets, outlined above, are real and cannot just be ignored by investors. But they sort of are being ignored. The same assets are being bought over and over and are being funded through leverage (debt) or by selling other assets.

This cannot carry on for ever, the question is when will it stop and what will the outcome be? It feels to me we are approaching a pivotal point, though I do not know when it will be or why it will be triggered.

It was interesting that when some unexpected bad news hit the headlines recently, elements of the “momentum trade” fell sharply, namely many of the giant AI companies’ share prices fell. It was triggered by stories of new US trade tariffs being levied on China. Interestingly, the Trump administration moved quickly to calm those fears, A cynic might suggest self interest could have played a part.

Nonetheless, it did show that sentiment and investor decision making is fickle after big upward moves in markets. Greed takes hold when markets are rising, pushing them higher and fear grips when prices start falling. Those two factors can lead to very sharp moves.

I don’t know if one or the other of those or neither will happen, I do think there is a high chance of one or the other, and, if it is a further move up, it may well result in a bigger fall.

Therefore, caution is appropriate. Whilst it might be a fun ride for now, standing by the exit might be advisable in the short term.

Maybe, just maybe, it can’t get much worse in the UK

The UK has been unfavoured by investors whether domestic or international, retail or institutional as a place to invest money for years, certainly going back to the Brexit referendum in 2016.

That has continued more recently, driven by the political turmoil of the last government, continued by the current one, which has dampened economic growth and left government finances in a parlous state, for which there is no simple solution.

We know current economic growth is weak and forecasts are unexciting. We know that inflation has been higher than hoped and forecasts suggest it will not fall sharply, meaning it is difficult for interest rates to fall quickly. We are told there is an enormous “black hole” to fill, which will, in all likelihood mean the November budget will deliver large revenue raising measures (tax increases) and little by way of spending cuts or investment.

My point here is “we know”, therefore that should be reflected in asset prices. So, simply, if it is no worse than expected, will there be relief and therefore room for optimism? Let’s see, but that is a clear possibility.