December: Yes, Virginia there is a Santa Claus - rally

November 30, 2016 09:00 AM
U.S. economic data and select global influences

If the market rebounds in December many partisans will likely attribute it to their candidate winning this year’s presidential election, but history shows December is a strong month for equities. It has been the best performing month for the S&P 500 since 1950 and the second best for the Dow Jones Index and Nasdaq Composite (see “Vital statistics”). 

This is arguably due to the common practice of end-of-year window dressing (buying outperforming stocks to claim them in your portfolio), end of quarter rebalancing for tax purposes and perhaps corrective moves following historically poor performing months. Either way, the so-called Santa Claus rally is a real phenomenon. While in recent election years the market has underperformed the December average, there is no clear trend we can decipher. Nor has December’s performance proven to be any type of market indicator. In December 2008 the S&Ps were positive in the midst of a market crash and it had one of its poorer months (-2.15%, in 1996) in the midst of a huge bull market. 

Market analysts suggest that a Trump victory would lead to greater volatility while a Clinton victory would lead to a relief rally. Either way, this would probably occur in the weeks following the election, allowing — in the case of a Trump victory — the markets to rebound in December. 

The one lump of coal in this analysis is the fact that the FOMC meets in the middle of December and already has telegraphed a rate increase. While there is no guarantee of this and the market has consistently held protest selloffs — like a spoiled kid who didn’t get what he wanted for Christmas — every time it looked like the Fed would pull the trigger on a rate increase, there was a chance that an actual rate increase would lead to a “buy-the-rumor-sell-the-fact rally.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.