Seven Reasons December Should Be a Strong Month for Stocks

Last week saw one of the best weeks of the year for stocks, as it was your typical late November seasonal strength. The big question now is, can it continue? We think so, as we’ve been on record all of November that new highs were coming. That call wasn’t very popular when the S&P 500 was down nearly 6% from the late October highs, but we’ve stuck to it and we are open to more new highs and solid gains to end this already nice year.

With that, here are seven things to know about December that could benefit the bulls.

First, December is the most likely month to have gains, with the S&P 500 higher more than 73% of the time.

Second, stocks were lower last year in December, but two down years in a row is quite rare. In fact, 2014/2015 was the last time we saw back-to-back negative Decembers and you have to go back to 1980/1981 the time before that. All of this suggests the odds of a down December this year is low.

Third, December is the third best month of the year since 1950, up 1.4% on average, but take note that the past 10 years December has been quite weak at slightly negative, with only September worse.

Fourth, many will talk about the “Santa Claus Rally,” a well-known seasonal pattern, and imply it is the full month of December. This isn’t true, as technically this bullish period is the final five trading days of the year and the first two of the next year. We’ll discuss this more over the coming weeks, but for now here’s a nice way to show the first half of the month tends to be choppy, with gains coming later in the month.

Fifth, this month has only once been the worst month of the year and that was in 2018. I remember that one well, as the market had a near bear market crash when the Federal Reserve refused to cut rates and the market threw a big fit. The worst month of the year has actually been August and September more than any other month.

Bottom of Form

The good news is the Fed likely cuts next week, so we don’t see a repeat 2018 anytime soon. And in case you are wondering, the worst month this year was back in March, when the S&P 500 fell 5.8%.

The flipside to all of this is this month is rarely the best month, as it has done that only four times the past 75 years. In the end, December rarely has big swings either way.

Sixth, a good first 10 months of the year tends to end with solid gains the final two months. In other words, a chase into the end of the year is common. We shared this one last month and we still view it bullishly. When the S&P 500 is up more than 10% for the year heading into November, those final two months have been higher an incredible 16 times in a row. With stocks pretty much flat in November, this could bode well for December.

Seventh, the S&P 500 is up seven months in a row and although that is one of the longest streaks ever, we’ve seen 16 other times it made it this far and continued gains are quite common.

Looking at those 16 long win streaks more closely shows the next month gained 10 times, but even more impressive is three and six months later the S&P 500 was higher 14 times. There may be reasons to be bearish, but up seven months in a row isn’t one of them.

The bottom line is after a 38% rally in six and a half months, some type of shake the tree pullback was needed. That is exactly what we saw in November, as stocks pulled back nearly 6% and in many places we saw historic amounts of fear. We think it may have been necessary to shake the weak hands out this year to set up a potential late year rally.

Thanks as always for reading.

Happy Holidays.

Richard Siminou

Financial Advisor in New York