‘Tis the season for a stock market rally.
December is the best month of the year for equities… and it begins tomorrow.
Since 1990, the S&P 500’s average price change for December has been +1.83%, which exceeds that of every other month, including October’s 1.77% average gain.
The stock market’s positive end-of-year seasonality is shown in the chart below:
As you can see, December also has both the highest minimum and the highest maximum gains since 1990.
In December of 1991, the S&P 500 surged an incredible 11.2%, the best monthly advance over the past 25 years. The worst December for the S&P 500 during this timeframe was a 6% decline in 2002.
Clearly, there’s an edge to owning stocks in December.
These data also further support the “Sell in May and go away” market adage, as the average returns for June, August, and September are all negative. August has been the worst month of the year on average, even if you exclude this past August’s harrowing 6.3% decline.
Cash in Your Chips?
In general, I think these seasonality patterns are extremely interesting – but they aren’t particularly useful.
Some traders may want to adjust their exposures based on the month of the year or even the day of the month. However, for most investors, holding a diversified portfolio of global stocks and bonds is the best way to take advantage of any stock market strength at the end of the year.
This way we can rebalance our portfolios and reduce risk, yet weather the bad months when seasonality fails us.
It’s also important to keep in mind that the prevailing market environment is far more important than seasonality factors.
The worst months shown in red on the chart above were all associated with one of the following events: the Russian default of 1998, the collapse of the technology bubble, the credit crisis of 2007-09, and the European sovereign debt crisis.
An assessment of the macro situation will always provide us with a more profitable course of action than seasonality.
Now, we’re not currently in a crisis, but we are in the midst of a merger mania, and credit conditions are tightening.
Therefore, this December may prove to be an opportune time to raise cash, regardless of whether the month is positive for stocks.
Safe (and high-yield) investing,
by Alan Gula, CFA