It’s the most wonderful time of year for stocks.
December is by far the best month of the year for the stock market. Since 1928, the stock market has posted a gain for the month of December in 63 out of the 83 years, or 76% of the time. To put this impressive December track record in context, the next best months are January and April at just 63% of the time. And given the rugged November experience for the stock market thus far, many investors are likely hoping that 2011 is a year that Santa brings another December rally.
So what does history tell us about what we can expect this year? Given that stocks are now down over -7% so far during November, including hemorrhaging declines over the last six trading days through Wednesday, it is hard to conceive stocks setting up to rally through the end of 2011. And the Thanksgiving week rally, which has historically occurred 64% of the time in similar market environments, certainly has not materialized this year with stocks setting up to post the worst Turkey week performance since 1973. But history suggests that the odds are still fairly even for a December rally even after the stock carnage we’ve seen in recent weeks.
It is worthwhile to stand back and evaluate past Novembers in order to help predict what we might see this December. First, of the 20 times that the stock market has posted a decline during the month of December, seven of those instances have occurred following a monthly decline in November. It is also worth noting that each of these seven past instances took place during past secular bear markets (1930, 1931, 1937, 1941, 1969, 1974 and 2007) and occurred following particularly severe November stock pullbacks at -5.4% on average. And stock performance in December proved equally challenged in these past seven instances, with an average return of -5.2%. This suggests that a further sharp stock market decline is certainly not out of the question as we move into the final month of the year.
A sharp November decline certainly does not mean that the fate for stocks has been sealed for December either. Eight other instances have occurred during secular bear markets where stocks declined sharply in November (1929, 1932, 1939, 1940, 1943, 1973, 2000 and 2008) only to go on and rally strongly in December. In these past eight instances, stocks declined by an average -7.8% during November and went on to rally by an average of +2.8% for December. Thus, an unexpected rally in stocks cannot be ruled out either.
So we’ve seen this story before. Fifteen times over the last 83 years as a matter of fact. In seven instances, the punishment for stocks continued into December. And eight other times, stocks found renewed life and rallied higher.
As a result, history suggests the odds are fairly even for a December rally in stocks. While a December rally seems implausible in 2011 given the dire circumstances in Europe, such a bounce seemed equally unlikely back on October 4 when the stock market suddenly reversed and went on to post the third best October monthly gain since 1928 at nearly +11%. But if any rally were to occur between now and the end of the year, it should be viewed as an opportunity for long-term investors to lock in short-term gains and adjust asset allocations, as risks for the stock market remain heavily biased to the downside given the ongoing crisis in Europe.
While the direction of the market remains uncertain, one thing seems highly likely. The extreme stock market volatility is almost certain to continue as we move through the rest of the year.
Disclaimer: This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.