The December seasonal pattern is a powerful one. Last 13 years, this calendar month was positive 10 times for the S&P 500 index. During the worst December since 1999, the loss was under 2%.
Here are the average returns (%) of SPY since 1999 for the whole month, then split in two periods: before and after Christmas.
This confirms the existence of a "Santa Claus Rally" before Christmas, which is worth 1.56% on average for the period. Academic publications have tried to identify possible reasons, but none is scientifically convincing. Common sense tells us that it is driven by the highest retail activity of the year. But the weight of really Christmas-sensitive businesses is not high enough to trigger such a move on the global index. The most convincing explanation is that the stock market is driven by states of minds, and that Christmas is a symbol of hope, family and happiness. A symbol strong enough to move for a short time the mood of billions of human beings toward irrational optimism. After all, investors and fund managers are also human.
The reality appears a little bit more complicated in the week by week return from the 1st of December:
|1st to 7th||0.85|
|8th to 14th||-0.18|
|15th to 21st||0.73|
|22nd to 28th||-0.1|
|29th to 31st||0.96|
It shows a Santa Claus Rally in two waves, the 1st and the 3rd week of the month. But above all, it shows that the strongest week is just the last three days.
This has nothing to do with Christmas and Santa Claus, but with a limited group behavior. Fund managers can't change their annual results any more, but they still can make their portfolios look better buying well performing stocks. They also sell some of their bad positions, but the global effect suggests that a lot of idle cash is suddenly pouring in the market in three days. This late rally is known as a "Window Dressing" effect.
So December has not one, but two seasonal patterns: Santa Claus Rally until the 24th, and Window Dressing days from the 29th.
|Santa Claus (until 24th)||1.56||1.81||2.29||3.28||1.52|
|Window Dressing (from 29th)||0.96||0.87||0.6||0.92||1.63|
The Santa Claus Rally is the strongest in small caps, so is the whole month of December, whereas the Nasdaq shows the best performance in the Window Dressing days. I don't show results by sectors: cycles of different and variable lengths make things complex and less reliable than for general indexes.
We can see the same biases in all national indexes, I will end with an example. Readers who are used to my articles already know that the German stock market is one of the most sensitive to seasonals (click here to read). It is confirmed once again. EWG shows average gains for 13 years of 3.17% for the Santa Claus Rally, 1.67% for the Window Dressing days, and 5.28% for the whole month of December.
Additional disclosure: This article is based on statistics and has no predictive value for the current year.