December is often a good month for stock investors, as many markets tend to rally during this period. According to historical data, the S&P 500 has gained an average of 1.3% during December, the highest average of any month and more than double the 0.7% gain of all months. Even in the Philippines, stocks in December tend to do better vs. previous months.
But what are the reasons behind this seasonal phenomenon?
Why Does This Happen?
There could be many reasons why stocks in December typically do better.
- Window dressing: This is a practice where fund managers buy stocks that have performed well during the year to improve the appearance of their portfolios before the year-end. This creates a positive feedback loop, as more buying pushes the prices of these stocks higher, attracting more buyers.
- Tax-loss harvesting: A strategy where investors sell stocks that have declined in value during the year to offset their capital gains and reduce their tax liability. This creates a negative feedback loop, as more selling pushes the prices of these stocks lower, attracting more sellers. However, some of these investors may buy back the same stocks in December, after the 30-day wash-sale rule expires, to restore their positions. This creates a rebound effect, as more buying pushes the prices of these stocks higher, attracting more buyers.
- Holiday spending: This is a factor that affects consumer discretionary stocks, such as retailers, restaurants, and entertainment companies, that benefit from the increased spending during the holiday season. Some believe that retailers tend to invest more during the holiday season.
- Santa Claus rally: The term refers to the tendency of stocks to rise during the last five trading days of December and the first two trading days of January. This phenomenon is attributed to various factors, such as the optimism and cheerfulness of investors during the holiday season, the anticipation of the January effect, and the low trading volume that makes the market more susceptible to price movements. In effect, stocks in December could be benefitting from the positive feedback loop created.
Should You Buy Stocks in December?
Of course, these factors are not guaranteed to work every year. Factors like the economic outlook, the monetary policy, and geopolitical events can all affect stocks in December. Therefore, investors should not rely solely on seasonality. Treat it as a tailwind, and use other tools and indicators to better time your investments.
In summary, stocks in December tend to perform well, as there are several seasonal factors that create a positive momentum for the market. However, investors should also be aware of the risks and uncertainties that affect the markets.
