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While the month of December 2024 promises to be full of twists and turns, given the tense political and diplomatic environment, the stock market trend is historically calm for the last month of the year. These end-of-year festivities are usually synonymous with performance on the markets. The data compiled by Yardeni Research, which has tracked the S&P 500 since 1928, bears witness to this trend: December was mostly positive, with 70 closings up against only 26 down. However, although December was the best-performing month in terms of frequency of gains, the amplitude of these gains remained modest. With an average gain of +2.99%, it just surpasses February, while average declines stand at -3.19%. From this we can conclude that December often wins, and if it doesn't, it loses little.
A more detailed analysis of the data reveals a stock market phenomenon known as the "Santa Claus Rally". This refers to a bullish trend often seen in the stock market around Christmas time, generally observed in the week preceding December 25, but sometimes extended to January 2. Yale Hirsch, founder of Stock Trader's Almanac, invented the concept in his 1972 book. He defined the last five trading days of the year and the first two trading days of the following year as the rally dates. In fact, the earliest mention of the saying "Sell in May and go away" is to be found in the City's daily newspaper of record - in a 1935 edition of the Financial Times, the article already presenting it as an old adage.
The rally also acts as a barometer of expectations for the following year: since 1994, stocks have risen 23 times during this period. Of these occasions, the following year has been positive for the S&P 500 in 18 cases. Of the six times when stocks fell during the Santa Claus rally, the market fell in four of the following years.
This trend could be explained by several potential factors during the seven-day trading period in question. Among the reasons cited was the drop in trading volume due to the absence of institutional investors after Christmas, increasing the influence of retail investors, who are often more optimistic. Some investors buy shares in anticipation of the "January Effect", anticipating a rise in January, often following the reinjection of capital after December's tax-driven sell-off.
The period between Christmas and New Year can also inspire a sense of hope and optimism for the year ahead. In addition, year-end bonuses and gifts give people extra funds to invest. Finally, once the Santa Claus rally becomes a recognized phenomenon, it can be self-sustaining: if people believe in it, they will invest accordingly.
Some past facts point in this direction according to Stock Trader's Almanac research:
- In 2018, the S&P 500 closed December up 6.6% after December 24, which corresponded to the last four trading days of the month.
- In 2008, during the subprime crisis, stocks experienced a Santa Claus rally in the middle of a bear market. Over the seven-day period, the S&P 500 gained 7.5%, before bottoming out on March 9, 2009.
- In both 2008 and 2018, Santa Claus rallies successfully predicted bull markets for the following year. In 2009, the broad index gained 23%; in 2019, it's up 29%.
What about Europe?
STOXX 600
The STOXX Europe 600, which groups 600 large, medium and small-cap stocks from 17 European countries, has shown interesting monthly variations since January 1998. By analyzing historical data, we can identify the months that are most conducive to gains and those that present greater downside risks.
The European flagship index displays seasonal trends similar to those observed on the S&P 500, particularly in spring and winter. April stands out as a particularly favorable month, tied with December in terms of the number of bullish months. Gains are often more modest at the end of the year. June, on the other hand, is often marked by declines, although for the S&P 500, these occur earlier in May. August and September are generally unfavorable, with a negative peak in September (average decline of 5.15%) also visible for the US index (-4.70% on average).
In summary, stock market indices such as the S&P 500 and Stoxx Europe 600, show similar seasonal patterns. December remains a strategic month for investors, offering an opportunity for moderate but steady gains, and paving the way for an often promising start to the year. Spring, particularly March and April, seems to offer more frequent and stable earnings opportunities. By contrast, the summer months, particularly August and September, are often unpredictable and riskier. So, "Sell in May and go away" doesn't come out of nowhere. It's important to remember that these trends, while historic, are not a guarantee of a profit, and are in part self-fulfilling. If you're just starting out in the stock market, you'll need to look beyond the calendar.
