Theories that aim to predict stock market performance range from the complicated and impenetrable to the arcane and simply ridiculous. But some are wonderfully clear: for example, December is usually a good month. In the festive spirit, and not to be taken too seriously, we’ve duly found that the evidence supports the existence of a “Santa Claus Rally”.
Our test of choice, which we may as well call a “Santa Score”, is the result of dividing the average performance each December by the annualized total return over the period. Since there are 12 months in the year, a Santa Score of around one twelfth (about 0.08) would be expected; a Santa Score above 0.08 indicates that December is a better month for stocks, on average.
With an average Santa Score is 0.36, not a single market fails our test. December has been, on average, around four times more profitable than the average month. A Santa Score above 1.00 implies that investing only in December (and doing nothing for rest of the year) is a market-beating strategy; Japan clocked in a remarkable Santa Score of 1.13.
Have you been good?
At least in the past few years, December has borne gifts for equity investors. But does the market’s good or bad behavior earlier in year have any influence? Exhibit 2 shows the average performance during December for each of these markets, split into those times when the previous 11 months had generated positive (“nice”) or negative (“naughty”) returns.
There is an exception: small-cap U.S. stocks. Interestingly, they may be last on Santa’s list, but may benefit from a January effect, instead. Otherwise December’s returns are better in the “Nice” column for every market.
Naturally, that begs the question of how the markets have been doing. This is answered in final column of Exhibit 2 – and the good news is that every each market is showing positive return year to date. So, pat yourselves on the back and tuck into your Christmas parties! Let’s raise a glass to momentum and seasonality. And hope Santa has noticed.
This article was written by Tim Edwards, director, index investment strategy, S&P Dow Jones Indices.
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