We’re early into December and Christmas music has begun to play, which has led my three-and-a-half-year-old daughter to begin dreaming of the gifts that Santa Claus will bring on Christmas morning. If Santa actually cared about investment returns (which I highly doubt), one could argue that he often leaves us a wonderful present full of returns as opposed to a lump of coal. This gift has been referred to as the Santa Claus Rally, which describes the tendency for the S&P 500 to increase in value during the last week of December through the first couple of trading days in January. In fact, as the table below highlights, this yuletide cheer begins in November and lasts through the month of January.
Over the past 69 years, November, December, and January have seen median returns of 1.8%, 1.3%, and 1.6%, respectively, ranking them as the best three months in terms of highest median monthly returns. Over that same period, the months of November, December, and January have delivered positive returns 68%, 74%, and 61% of the time. Why is that? There are several theories that include window dressing of portfolios by managers and tax considerations. The real reasons are likely as mythical as Santa Claus himself.
Jolly Old Saint Nick visits children around the world, but is the Santa Claus Rally as internationally recognized?
In Canada, it appears that Kris Kringle comes early in November but doesn’t stick around to celebrate the New Year. Over the past 69 years, November and December have seen median returns of 1.8% and 1.7%, respectively, ranking them as the best two months in terms of highest median monthly returns. Over that same period, the months of November and December have delivered positive returns 65% and 83% of the time.
It appears that the impact of Père Noël (France), Papá Noel (Spain), or Babbo Natale (Italy) in Europe, as measured by the MSCI Europe, is not quite as strong. Over the past 19 years, December has seen median returns of 1.6%, ranking it the third-best performing month after October and July, with returns of 2.6% and 1.7%, respectively. December has delivered positive returns 65% of the time.
In Asia, as measured by the MSCI Asia ex Japan Index, it appears that Dun Che Lao Ren likes to make an appearance. Over the past 48 years, December has seen median returns of 2.5%, ranking it the second-best performing month after October, with a return of 2.6%. December has delivered positive returns 61% of the time.
As U.S. markets hit all-time highs and global markets near multi-year highs, we ask ourselves “what has changed?” and “how has it changed for the better?” In reality, nothing has changed for the better that would lead to an improved earnings environment. Manufacturing is still in contraction, global trade is still negative, copper prices and semi-conductor sales are still suggesting weakness. All the while stocks get more expensive, as the markets move up, while earnings are flat. We have heard the argument of a “correction in time if not magnitude”. But we’re not buying it. A correction is supposed to result in less expensive markets, not more. And a “phase one” trade deal that doesn’t include a rolling back of the existing tariffs doesn’t lead to a better environment.
However, we are not in the recession camp, but we feel investors are a bit too optimistic given flat earnings and a slowing global trade environment. Historically, the annual return for long-term investors has been driven by earnings growth and dividends. If we put aside the noise around politics and trade, earnings growth and dividends would suggest a return over the next year of low single digits. However, one could expect a continuation of the rally over the coming months because of seasonality, as we have highlight above.
If history is any guide, the party is likely to continue into the new year. BUT, although we are not so pessimistic to suggest that we are headed into a recession and bear market in the next 6-12 months (yet), we are not optimistic enough to think that anything other than trimming equities into market strength while de-risking on uncertainty is the prudent investment decision at this point in the economic cycle.
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