Wall Street boasts split personality in December
Stock market often starts month slowly, then ends with bang
December historically has been a profitable month for the U.S. stock market, which often enjoys a year-end rally. But December has a split personality, as slow starts to the month typically are followed by big stock rallies — and sizable gains — in the trading sessions after Dec. 15.
The split tape in December is illustrated best by data from Bespoke Investment Group. An analysis of December performance since 1995 found that the Standard & Poor’s 500 stock index has posted an average loss of 0.3% and finished up less than half the time in the period from the end of November until the market close on Dec. 15.
In contrast, stocks have kicked into high gear after Dec. 15, with the large-company stock index posting average gains of 1.7% and finishing up 80% of the time through year end.
Explaining this seasonal phenomenon on Wall Street is more difficult than simply laying out the statistics.
USA TODAY asked some market pros to posit some theories as to why stocks tend to fly high in the waning days of December. While they all hinted that making sense of December’s quirky return timing is more art than science, here’s five possible explanations for the late December bounty.
1 HOLIDAY OPTIMISM Holiday cheer spills over into the market, giving investors a reason to buy. “Holiday optimism and upbeat forecasts for the new year spread and lift sentiment so folks feel better and, therefore, are a little more optimistic,” says David Kotok, chief investment officer at Cumberland Advisors.
2 FED CLARITY The last Federal Reserve meeting of the year occurs in mid-December. And what the Fed says about interest rates and their policy views often can reduce investor uncertainty. “Investors get some clarity in the second half of December,” Kotok says. And this December will be no different, as the Fed is expected to raise interest rates for the first time in nearly a decade, a move that would end all the questions about the timing of the U.S. central bank’s ratehike “liftoff.”
3 TAX-PLANNING MOVES “Choppiness early in the month may be due to people making tax decisions, such as selling losers to offset gainers,” says Paul Hickey, co-founder of Bespoke Investment Group. Year-end tax-loss selling is often completed by the middle of December, allowing investors to start redeploying cash into the stock market after the required 30-day waiting period, adds Jim Paulsen, chief investment strategist at Wells Capital Management.
4 BONUS TIME The holiday season ’tis the time for year-end bonuses and tips for a job well done. “Late December (market) strength is partially due to the fact that as people receive year-end bonuses or tips, they tend to save at least some of it, and ultimately some of that money finds its way into the market,” Hickey adds.
5 FUNDS PLAY CATCH UP It’s not unusual for fund managers that are trailing their benchmarks, such as the S&P 500, to invest more aggressively at the end of December in an attempt to turbocharge their returns and finish the year with gains bigger or at least equal to their benchmarks. “If managers are underperforming and panic, (they may play) ‘catch up’ the closer you get to year end, pushing gains up even more toward the (end of December),” Paulsen says.