The S&P’s record year raises the stakes for December. Can Wall Street maintain momentum, or is the rally running out of steam?
‘Tis the seasonality. Well, if Santa Claus plans on landing his sleigh on Wall Street, he had better get a move on, as time’s a-tickin’ away. Don’t get me wrong, the month has been OK, but with only a mere 0.31% gain so far, it’s feeling like it may take more than a few shots of espresso to push through the average. You are probably thinking, “Mark, why are you so sour, this is the season of jolly, and the market is up by almost 27% year to date?” This has been a great year so far, I cannot argue with that. I was very bullish throughout the year, and indeed, the market has even performed better than I had expected.
In many cases the sectors, industries, and stocks I had high-conviction on, did outperform. Then there were some sectors and stocks that I was not expecting to perform well, but they actually DID perform well. I won’t get into those, but most of those positive surprises came with the recent tide of exuberance that washed through the markets. 😉 Well, good on them, but let’s get back to the ones that I did expect to outperform. Not only did they outperform, but in some cases, they simply rocketed to heights I had not counted on. Of course, I will take the wins, but as you have probably noticed in my recent writings, too far too fast always concerns me, even if the levels are justified.
Think of it like this. Let’s say, I expected a stock to hit 100 by the end of the year. All of the earnings releases to date have been in line with my estimates. Of course, there were some macro challenges along the way. Interest rates have not pulled back quite as quickly as we might have thought earlier in the year. And the outgoing administration, despite common conception, has launched its fair share of trade sanctions which could have disrupted earnings growth. I play the long game, so I am not too sensitive to volatility. I accept daily volatility as a cost for great expected returns; it doesn’t come free my friends. I also accept that seasonality will do its best to scare me away. But here we are in mid-December and that stock hit 100 a few months back and is, in fact at 110! What happens next? Will the historically solid December help me get further gains yet, or am I done for the year? Wait, there is another concept I have been talking about a bit lately, seasonality.
Market seasonality refers to predictable patterns or trends in stock market performance that occur during specific times of the year. We have talked about the Santa Claus rally, which is a type of seasonality. Seasonality can be caused by a number of recurring events such as holidays, earnings season, tax calendars, and, of course, market psychology. We find seasonal patterns by observing market behavior in the past. We love to do things like that on Wall Street, despite the Efficient Market Hypothesis stating clearly that past market patterns cannot reliably predict future ones (the Weak-form). That is why you hear many folks, including myself, saying things like “September is typically a tough month for stocks.” That is because September has been a bad month for the S&P500 historically. In fact, on average, September has been the worst performing month of the year on average for the last 30 years. October is pretty good, and November is best. Wait, why don’t I just show you how stocks have done since 1995. Take a quick look.
How awesome is this chart from Bloomberg! Just look at the top row of the chart to see the averages. You can see the “tough” months in red, February, August, and September. But you might also note that Q4 is the best. That is where we are right now, and that 1.04% average December performance should reflect any past Santa rallies. Here we can see that Santa came to Wall Street all but 8 years. That is not bad, allowing us to predict a 72% chance of a Santa Claus rally happening this year. Those aren’t bad odds for Wall Street. Looking back on history, we see that on average, there are 3 losing months per year, but this year, we have had only 2… so far. April, which was a painful one, and October which was hardly noticed. Last month was a really strong month for the market. It is historically the best month and this year, in particular, it was helped along significantly by Trump’s election win. In fact, going back to 2020, November has been really, really strong! Even with the excitement around the elections, this November underperformed the 4-year average of 6.05%. Don’t worry though, the S&P’s year-to-date 26.86% gain far exceeds the average 10.05% annual gain since 1995.
So, have I confused you yet? I hope not. If you stare at the above chart enough, I am sure that you will find some interesting patterns for yourself, but it is clear that December should be a good month. Will this December end up above or below its 1.04% 29-year average? I am sure you are hoping for ‘above,’ and so am I. But is it possible, as I implied above, that we have come too far too fast? Well, if we look at how the S&P traded last week, we note that early morning surges could not be sustained, ultimately trading off in the afternoon session in all but one day. Even Wednesday’s rally fizzled out by noon, trading flat into the close. Just check out the chart below to see how clearly it appears that traders simply do not have the strength to maintain rallies. Unfortunately, if this trend of losing steam continues, the chances for that December win over the average start to look slimmer. To be clear, this jampacked week of important economic figures along with the FOMC meeting could be the game changer. Indeed, by the end of this week, we will know if we ate all the Christmas cookies before Christmas Eve. But don’t lose hope, there is still plenty of time for Santa to get his sleigh to NYC in time for the holiday, just leave a few cookies for him, just in case.
FRIDAY’S MARKETS
Stocks had a mixed close on Friday, unable to hold on to earlier gains as investors grasped for a reason to be so bullish ahead of this week’s telling FOMC meeting. An upbeat earnings announcement from semiconductor superstar Broadcom helped the tech-heavy Nasdaq composite hold on to its gains while the other indexes slid in despair.
NEXT UP