Indicator of the Week: Is the S&P a Slam Dunk in December?

The SPX historically fares well in December, but its recent strength suggests year-end gains may be modest

Senior Quantitative Analyst
Dec 2, 2015 at 7:21 AM
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The table below shows how the S&P 500 Index (SPX) has performed on a monthly basis over the past 50 years. December has been a pretty bullish month, averaging a gain of 1.49%, barely below April's 1.51% average -- which is the best month of the year. December has been positive 72% of the time, which is the highest percentage of all the months. Finally, measured by standard deviation, we are now in the least volatile month, which is also a positive. However, if you're going to buy stocks based on seasonality, I wouldn't buy just yet.

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Why Wait?: The chart and table below show why I would hold off on buying stocks based on seasonality. Despite the bullishness of December overall, the first half of the month has been a struggle for stocks. Over the past 50 years, the SPX has actually averaged a loss over the first 15 days of December, with just 54% of the returns positive. Based on that, you would be better off standing pat until mid-month, and then buying stocks. The second half of the month has averaged a 1.59% return, with an impressive 80% of the returns positive.

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Strong Fourth Quarters: Buoyed by a strong October, the SPX has risen by more than 9% so far in the fourth quarter. Unfortunately, the stronger the fourth quarter heading into December, the weaker December typically performs.

The table below shows December returns over the past 50 years, based on how the first two months of the quarter performed. You can see that when the index has been negative in the fourth quarter heading into December, it has been up almost every time, averaging a gain of 2.91%. When the index has gained at least 5% for the quarter heading into December (like this year), the SPX averages a return of just 0.43% through the rest of the year, and has been positive 55% of the time. In other words, in the past when the quarter has already been strong, December has been just an average month. The average return of 0.43% would rank seventh among all months, looking at the first table above.

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