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Historically, December has been the second strongest month of the year on average for stocks, a phenomenon known as the Santa Claus rally. This is apparently due to an end to tax loss selling and adjustments which bring current expectations in line with reality, plus the hope that the coming year may be a better one for corporate earnings and the global economy. This burst of optimism sometimes continues into January, creating a New Year’s rally, but often fades, leaving January less positive on average than other months.
A look at average daily returns over the last two decades in December and January show even through a seasonally strong period, markets can experience ups and downs. Historically, December has started out positive but then seen some weakness toward mid-month, particularly between the 11th and the 15th which is likely the peak of tax loss selling and portfolio adjustments going through.
The strongest days for the markets run from December 16th through to 26th. This is the time most associated with the Santa Claus Rally and appears to start after the final Fed meeting of the year.
The two holiday weeks are typically either flat, or slightly positive, and usually see lighter than usual volumes with many traders off on holiday and shortened weeks. From the 7th of January onwards, returns tend to be negative, particularly around 12th to 16th, which coincides with the start of earnings season for companies. This suggests that initial enthusiasm about the New-Year may quickly be cooled by corporate results and guidance.
This year, in addition to the usual seasonal cycles, we also have a Presidential cycle at work, which may take more precedence with a new president and party coming in to power. The table below which looks at what happened to the Dow in the months after a new Republican was elected since 1950 shows that results through the transition phase have historically been quite mixed.
In all of the cases since Nixon was elected in 1968, for each new President, one of November or December and one of January or February was positive and one was negative. In the case of President Eisenhower in 1952, November and December were positive but January and February were negative.
This market action suggests indecision and trepidation among traders about what the new incoming President may do and what changes they may make to the direction of the country and the economy. This year, following the election of Donald Trump, the market staged its biggest Republican win rally since Reagan in 1980. Based on that, we could see a retrenchment and correction this month. If the markets do remain positive through December and postpone the common pullback, we run the risk of a significant correction through January and February.