Does Seasonality Still Support a December Rally?

Posted by George Smith, CFA, CAIA, CIPM, Portfolio Strategist

Wednesday, November 30, 2022

As November draws to a close, many investors are looking forward to stocks delivering some holiday cheer and a potential December stock market rally. Today we take a look at what clues seasonality data may give us for stock market performance in December. Turns out that while, historically, December has been a very strong month for stocks, in recent years seasonality trends have been weaker, and a December rally has often failed to appear following a difficult year for stocks.

Looking back, historically, to 1950 (chart below), December has been the strongest month as measured by the proportion of positive monthly returns. It beats the next best month, April, with almost 4% more positive occurrences.

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Looking at average returns by month, dating back to 1950, December is the second strongest month, with an average return of just over 1.5%. Over the same time period, only November has a higher average gain—of almost 1.7%. However, when the data is broken out by time period, as shown in the below chart, the average December return has been waning, with average gains of only 0.9% and 0.5% when looking only at the past 20 and 10 year periods. This puts December firmly in the middle of monthly performance rankings over those time periods, with July being the strongest month over the past 10 years. Midterm year Decembers have typically been a little weaker than an average December, but still with a strong 1.2% average gain over the period dating back to 1950.

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The more recent midterm year data shows a similar pattern, with weaker recent December performance than the longer-term history. Recent midterm year Decembers have actually been negative on average, with midterm year Decembers since 2002 seeing declines of -1.3%, and -1% on average since 2012. A December rally has also often failed to appear when the rest of the year has been bad for stocks—as we’ve seen year-to-date with 2022. If stocks have been down more than 5% over the first 11 months of the year, then December has, on average, been around flat, with the average December seeing progressively worse average performance when the rest of year has seen a bigger drawdown for stocks. A decline of more than 15% from January to November, as we have seen this year, has, on average, seen December follow suit and end the month down by 1.4%.

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In summary, longer term seasonals are supportive for stocks in December, and as we explored in this blog, so is the presidential cycle, but shorter term seasonals warrant caution that a December rally may not be in the cards this year.


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