The S&P 500 is up more than 3% this week, leading the talking heads on TV to once again declare that a “Santa Clause Rally” is unfolding. It may seem kind of silly to hear professional investors talk in such terms, but December has historically been the best month for stocks.
According to the charts below from Yardeni Research, over the past 66 years the S&P has averaged a 1.85% return in the month of December, beating the next best month, April, by a pretty wide margin. In addition, December has had a positive return in 50 of those 66 months, which also ranks as the best.
A number of theories have been offered to explain the phenomenon – investors are in a better mood due to the holidays, fund managers are trying to hit performance targets for the year, etc. While there’s some logic to each of them, I don’t know that a credible reason has ever been confirmed.
For us, seasonal patterns like this are certainly interesting (and there are plenty of others, like Sell in May and Go Away, the Presidential Cycle, etc.), and at times helpful. But the overriding macro backdrop carries the day for us — after all, the average return for this “best” month is still less than 2%. So with the Euro crisis still in the forefront and signs of a possible global economic slowdown beginning to appear, we’re content to remain with our current defensive positioning.