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Santa Claus – does the rally really exist?

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Theories that aim to predict stock market performance range from the complicated and impenetrable to the arcane and simply ridiculous.  But some are wonderfully clear: for example, December is usually a good month for investors. 

In the festive spirit, S&P Dow Jones Indices has taken a look at the seasonality of some major equity markets and found that the evidence confirms December’s reputation for the “Santa Claus Rally”.  Moreover, markets with strong momentum seem to be particularly favoured.

 
S&P Dow Jones Indices designed a simple test to measure December’s profitability for investors.  Each market is given a “Santa Score” equal to the result of dividing the average performance each December by the annualized total return over the period.  Since there are 12 months in the year, a Santa Score of one twelfth (about 0.08) would be expected in the absence of any special effect. On the other hand, a Santa Score above 0.08 indicates that December is a better month for stocks – on average – than average. 
 
Not a single market fails the test, and the average Santa Score is 0.36.  December has been, on average, around four times more profitable than the average month across these markets.  And it gets better.  A Santa Score above 1.00 implies that investing only in December (and doing nothing for rest of the year) is a market-beating strategy; Japan clocked in a remarkable Santa Score of 1.13.
 
Have you been good? 

At least historically then, December has borne gifts for equity investors.  But does the market’s good or bad behaviour earlier in year have any influence?

So December is generally a good month for stocks, but performances are even better with a tailwind.  There is an exception: small-cap US stocks.  Interestingly, they may be last on Santa’s list, but may benefit from a January effect, instead.  Otherwise December’s returns are better in the “Nice” column for every market.
 
Naturally, that begs the question of how the markets have been doing.  The good news is that every each market is showing positive return year to date.  So, pat yourselves on the back and tuck into your Christmas parties!  Let’s raise a glass to momentum and seasonality. And hope that Santa doesn’t forget about investors this year.

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