Why is it that the equity markets tend to perform so well in December? Is it because the feelings of appreciation, celebration, and hope straddle the setting of one year and the dawn of another? Or is it because investors let go of near-term concerns and replace them with distant optimism, be they economic improvements, earnings expectations, or political possibilities? Regardless of the reasons, the results are undeniable.
The S&P 500’s average price gain in all Decembers since 1945 was the highest of all 12 months, as was its frequency of recording a positive performance. In addition, the S&P 500’s worst monthly decline was only half that of most months, and December saw the lowest frequency of 1% decline days of any month of the year. Finally, all 10 of its sectors posted positive total returns in December.
This year, we believe the odds again point to a favorable finale, as the expectation that the Fed will finally start its rate-tightening program lifts the veil of uncertainty. In addition, we see investors looking past the S&P 500’s 4.4% projected decline in Q4 EPS and focusing on the 8% gain anticipated for all of 2016. But as the S&P 500 draws ever closer to the all-time high of May 21, the possible setting of a new high this December won’t likely improve the chances of a better-than-average performance in 2016.
Since WWII, there have been 16 times that the “500” posted an all-time high in December. In the subsequent year, the “500” rose an average 7.5% in price, and advanced in 73% of those calendar years. Yet in all years since 1945, the S&P 500 gained an average 8.8% in price and rose 71% of the time. Therefore reaching a new record high in December may signal a slackening pace, more than representing a running start into the new year.