December Seasonality: Is the Santa Claus Rally Still Coming to Town?

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

Thursday, November 30, 2023

November lived up to its reputation as a strong month for stock market seasonality with the November “Turkey Rally” delivering outsized returns for stocks. Now as we look ahead to December, investors are asking the question: Is the Santa Claus Rally still coming to town?

November broke a streak of three consecutive down months for the S&P 500 and did so in style. With almost a 9% gain, this November ranks as the 18th best overall month since 1950, and fourth best month in the past 10 years (only beaten by July 2022 and November and April 2020). Historically, December has been a good month for stock market seasonals, with the strong returns often loaded into the second half of the month, hence the Santa Claus Rally axionym. But in recent years December has disappointed.

December is the third best performing month since 1950 but over the past five and 10 years December hasn’t been full of seasonal cheer for markets, with average returns negative for both of those periods. Only six of the last 10 and three of the last five Decembers have been positive with a drawdown of over 9% in 2018 dragging down the average returns for both periods.

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Longer term seasonals move weaker in the December-January two month window, these two months combined are in the lower performing half of all two-month return windows over shorter time periods, though the fourth strongest in all years since 1950. Over six-month return windows, as shown below, there is also a dichotomy between more recent and historic periods, with December to May being the worst six-month window over the past five and 10 years but the third best over all periods since 1950.

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When studying the proportion of positive monthly returns since 1950, December does deliver a present to investors with the highest proportion of positive monthly returns, at around 74%.

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Given the Santa Claus rally axionym, it’s perhaps not surprising that the stronger returns in December have typically been seen in the second half of the month. Based on all the periods studied since 1950, the second half of December was significantly stronger than the first half. Stocks were flat or even fell in value on average during the first half of the December, before, on average, rallying in the second half of the month (though on average the rally failed to appear at all in the past five years.)

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So, have positive stock market returns been “pulled forward” after the very strong month we just had? December, on average, is not as strong when it follows a positive November (0.83%), compared to when it follows a negative November (2.78%). However, based on historical returns, stock market strength begets strength when it comes the next 12 months following strong monthly returns. Looking at all periods back to 1950, there have now been 31 occasions where the S&P 500 has gained over 8% in a month. The average return a year later, from the end of the strong month, is almost 16%. This is significantly higher than the average for 12-month periods that followed months where stocks returned less than 8%. The instance of positive returns for the year following a strong month was also higher compared to following a less exceptional month.

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In our recent analysis of seasonals, we examined the performance of stocks after breaking a three-month losing streak.  November did indeed snap that streak and the good news for stock investors is the S&P 500 return one year out following such an inflection is well above average. Even including the exceptional return in November there is still plenty of upside over the next 11 months if stocks manage to reach the average 17.9% rebound following such occurrences.

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In summary, after an incredible November, overall stock market seasonals are still supportive for stocks coming into year-end. We maintain our slight preference for fixed income over equities in our recommended tactical asset allocation (TAA), but this is more a function of fixed income valuations remaining relatively favorable over equities due to their still attractive yields (even after recent declines). Stabilizing inflation, the likely end of the rate hiking cycle, lower long-term interest rates, and lower energy prices are all positives for stocks, but contrarian signals of sentiment and market positioning moving from very bearish to slightly bullish are now slight headwinds to further progress. We remain neutral equities, sourcing the slight fixed income overweight from cash, relative to appropriate benchmarks.


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