Are We Heading Towards a Christmas Rally?

We’re entering that special time of the year once again – the Christmas season! Why is that so special? Christmas is a magical time when everyone becomes more sensitive, tranquil, and in particular, more optimistic. During this time not even stocks escape the overall optimistic stance; they are usually buoyant during the weeks leading up to Christmas, as if traders were touched by Santa’s magic! Let’s look at what might be under the tree this year!

We collected some data for the S&P 500 index for the past 64 years and came to the conclusion that it rose 48 out of 64 times in December months. It is true that if we look at all months in the database for the last 64 years, the S&P 500 rose more times than it decreased, but the ratio is around 59.4%, while for December months alone it is 75%, which clearly highlights the special nature December has.

Looking at detailed data, we found that in 43.8% of the cases the rise experienced in December was between 0% and 2.5%, which occurred 28 times. Nevertheless, the market rose between 2.5% and 5% in 9 December months and in another 9 Decembers it rose between 5% and 7.5%. In two special cases, December was an especially good month, when the S&P 500 rose 11.2% and 8.6%. These performances occurred in 1991 and 1971 respectively.

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In terms of negative December months, 10 out of the 16 cases ended with the S&P 500 losing between -2.5% and 0%. In 5 cases, a loss between -5% and 2.5% occurred and in just one single case it was higher than 5%, in 2002, when the market sank 6%.

In statistical terms there is a strong correlation between December and positive returns. With the S&P 500 so far being flat in the month, the odds are in favor of it being a great opportunity to enter the market.

In terms of economic data, the situation is also favorable. Last Friday, the non-farm payrolls report showed a very strong headline number with payrolls raising 203,000. At the same time the unemployment rate declined from 7.3% to 7.0%. These data signal a strong momentum for the American economy. Unfortunately the other side of the coin is these data increase the risk for a QE tapering decision taken by the FED sooner rather than later, but we don’t believe that would happen this month. So, unless there is a big surprise from the FED, the Santa rally should go as in the past and continue to represent value for investors.

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