Most human activities have seasonal cycles. The stock market too, has seasonal cycles that have been powerful trends to follow over the long term. You have heard me mention the fact I believe the balance of the year and into at least the first month of next should be good based upon seasonal patterns. What I am going to do this week is provide you the basis for part of that view by looking back at the year-end strength normally seen in stock prices in December, known as “the Santa Claus Rally”. While it is not perfect here is a look at some of the SP500 Santa Claus rally statistics from the last 20 years.
80% (16 years) of the time December 31st ended higher than they started on December 1st
20 % (4 years) of the time December 31st ended lower than they started on December 1st
The 4 years in which the index ended lower looked like this
1996 – a 1.6% loss
2002 – a 6.1% loss
2005 - a 0.08% loss
2007 – a 0.74% loss
No one knows for sure but there are many reasons why this year-end rally might happen. Some things that may contribute include 1) during the holidays people spend more money on gifts which boosts corporate earnings 2) year-end optimism 3) fund and institutional money managers do tax loss selling and restructuring of their portfolios for the New Year.
While it is not perfect the historical patterns suggest one should be fully invested in November positioned for a potential rally. Even in the down years, the worst case scenario was a 6% loss. Even in two of the greatest bear markets, 2000-‘01 and 2008-’09 the markets took a pause from a severe downtrend to hammer out a positive return.