by: Richard A. Anderson
December tends to bring holiday spirits and positive stock returns. In fact, no month has a higher average return or has been higher more often than December since 1950. Additionally, since 1950, the S&P 500 has never had its lowest monthly return in December.
So far, however, December has been a month to forget for stocks. Through Friday’s close, the S&P 500 is down 12.45% this month. Stretching back to the S&P 500 peak on September 21st, the index is down 17.83%. As such, it is on pace to win the race for worst month of the year.
There have been many factors contributing to the recent stock market decline. The Fed announced last week an interest rate hike, marking the fourth time the central bank has raised rates this year. The U.S. Treasury yield curve has flattened, with some parts of the curve even inverting. Trade negotiations between the U.S. and China have been lingering. There is concern the global economy may grow at a slower pace than was previously anticipated.
While these issues have added to the wall of worry for investors, we believe this down period for stocks is the result of a dislocation between fundamentals and stock prices. The global economy is strong and corporate earnings have exceeded expectations. Of course, the aforementioned issues bear monitoring. However, we think the recent down period is a result of the herd mentality whereby investors are seeking safety in bonds and cash as they wait out a period of uncertainty.
Yet, there is always uncertainty. No one knows for sure when stocks will go up or for how long. We have been lulled into a false sense of security over the past couple of years because markets have been so calm. Since 1980, the average intra-year decline for the S&P 500 has been 14%. Right now, we are a little worse than the average.
I was planning on writing an upbeat, positive article for this week’s post, given it is Christmas Eve. But I didn’t think it wise not to share our thoughts on what’s happening in the markets. There is a silver lining. December is a historically strong month that has tended to see the lion’s share of its gains late in the month.
To borrow a line from the popular Christmas song first recorded by Andy Williams in 1963, “It’s the most wonderful time of the year.” The holiday season is a time often spent with family and friends filled with peace, joy, love, and happiness. For families with young children, it’s also a time of excitement as they anxiously await the arrival of Santa Claus.
Like children waiting for Saint Nick to slide down the chimney with a sack of gifts to place under the Christmas tree, investors also look forward to the arrival of Santa Claus. But for a different reason. Markets tend to rally at the end of the year and into the new year. This late year rally has been dubbed the “Santa Claus rally.”
Yale Hirsch first defined the Santa Claus rally in the Stock Trader’s Almanac in 1972 as the last five trading days of the year and the first two trading days of the new year. Since 1950, the S&P 500 has had an average return of 1.3% during this seven-day period. Moreover, the Santa Claus rally has yielded positive returns 75% of the time since 1969.
No one seems to know with reliability why the stock market tends to rally during the last five trading days of the year and first two trading days of the new year. Some have proffered that many institutional investors, who tend to be more sophisticated and pessimistic, tend to go on vacation during this time period, leaving the market to retail investors, who tend to be more optimistic. Other explanations include tax considerations and buying ahead of the “January effect,” which is the tendency for stocks to perform strongly during the first calendar month of the year.
The rational part of my brain wants me to remind you that it is best to maintain a long-term investment strategy and not be tempted by the seasonal anomaly that is the Santa Claus rally. This month can definitely serve as a reminder that these seasonal anomalies don’t happen all the time and shouldn’t be the sole driver of investing decisions.
But I don’t want to be a scrooge. So, in the spirit of the holiday season I’m hoping Santa Claus can bring some holiday cheer to all investors.