According to Biryini Associates the S&P 500 has risen 76% of the time from the day after Thanksgiving through year end. This phenomenon is known as a “Santa Claus Rally” as stock markets typically only go up about 55% of all calendar months. There is actually quite a bit of truth (at least on the surface) to Santa’s Rally as looking at the last 40 years December is the best performing month for stocks with an average return of 1.71%.
This begs the question, “Will we get a Santa Claus Rally in 2012?”
“There are three types of lies: Lies, damn lies, and statistics” – Benjamin Disraeli
While December as a whole has been a good month, it’s not without plenty of pretty bad times too. Consider some of these years:
Truth is, most of the time December is great. In fact, there are a whole bunch of great months where the market goes up 2% or more (sometimes even 5% or more). What I do find interesting though is the general pattern of poor Decembers. Looking at the data above you can see that typically at least once every 10 years and always at least once every 11 years December has produced a loss of 2% or more. This could just be me reading between the lines into nothing, but that is what has happened historically.
Since the last time we’ve had a 2% or greater drop in December was 10 years ago I suppose we just might be “due” this year. In statistics though this would be moot and total randomness – so for me its more of just a simple observation.
On the flip side I can’t help but take a look at where we are in the market and think something “big” is going to happen. Take a look at this chart below:
I’ve shown this chart via my Market Update videos over the past year. This one is zoomed in a bit more than those used in my videos, but show the same thing – the market is at a critical Inflection Point.
After a 8.3% drop from the 2012 high the market has recovered to roughly 1,406 (looking at the S&P 500). This has been a level the market has been bouncing off from for the better part of the last 6 months. If it can stay above that level I would suspect it will rally into the year end. If it fails to stay above it I suspect it will drop at least to the recent low (about 4% lower than current).
None of this has anything to do with Santa 😉
The idea of a December rally has mostly to do with consumer confidence. People are feeling more jovial than normal and they willfully rack up debt and spend money. Businesses prosper, earnings are strong, and investors drive the market higher.
While spending has been good this year, there are plenty of market headwinds. Namely the “fiscal cliff” and tax and spending cut repercussions that go along with it.
Since many investors with taxable accounts don’t want to sell holdings with gains if taxes go up next year, many are selling this year. When investors sell the value of stocks go down. Since Government spending is one of the largest contributors to our economy, if budget cuts are enacted the economy will not be as strong. At least that’s the simple logic.
As we round out the calendar year 2012 I think the markets will decisively finish in the black. Even if the market falters from here it would require the largest December sell off in market history for the years gains to be eliminated. However, how far we finish in the black I feel will be decided in the next few days – as we find out if the market can hold the current levels or fail and produce one of the worst Decembers in market history.
Over the next couple of weeks I’ll revisit this chart regularly and keep everyone updated. If we see a breakout (either good or bad) I’ll work up a video update and post it here on my blog. In the meantime – don’t worry. December is typically a great month for investors and this year should produce positive returns for investors no matter what happens. The real value in seeing if we can hold the current levels is likely going to happen in 2013, so consider this year end work prepatory to a good year then.