Expecting A Seasonal Year-End Rally In 2023?
Not When We’re Living In The Anomaly
One thing that a lot of investors count on around this time of year is a year-end rally in stocks. Whether you want to call it that or a Santa Claus rally or whatever, it’s the idea that people can take advantage of the seasonal anomaly that often sees risk asset prices gently rise to close out the year. There have been any number of attempts to explain why it happens more often than not. Some say it’s due to investors dropping year-end bonuses and pay raises into the stock market. Others say year-end tax planning contributes to it. A lot of people think it’s simply due to the happiness around the holiday season that inspires people to buy.
While there’s really no fundamental or economic basis for this to occur, it does tend to play out when you look at the numbers. November and December have traditionally been two of the best months of the year to own stocks.
Looking back at more than 70 years of history on the S&P 500, the month with the greatest number of instances of positive returns is indeed December with November coming in at a close #3. There’s really not a huge gap though between any of the calendar months (September might be the only notable exception), so I’m not sure that this is obvious evidence of a year-end rally trend. If we look at historical returns for the S&P 500, it’s a similar story.
The best of the month of the year has historically been November, not December, but that three-month window around the new year - November through January - is where the disproportionate bulk of the year’s returns have been. Again though, it’s far from a slam dunk. Even the 70-75% success rate of generating a positive return in November and December isn’t that statistically different from success rates and returns in most other calendar years.
The Russell 2000, however, is a bit of a different story.
As is the case with the S&P 500, small-caps have also had the greatest success rate at generating a positive return in the month of December, but there’s not a big advantage. The big September outlier we saw in large-caps has mostly vanished in the small-cap universe (although average returns still look relatively poor), but there’s not a major difference across many of the months.
When looking at historical returns in small-caps, however, there is a notable performance gap at year-end.
November and December have historically been the two best-performing months of the year for small-caps and it’s not really even close. Perhaps the idea of Black Friday sales has investors hunting for great bargains with their investments as well!
The point in showing all of these numbers is to demonstrate that, while there is evidence that November and December tend to produce better than average returns historically, it doesn’t happen so often that it should be considered an anomaly. Investors would probably be quite disappointed in knowing that the year-end rally many of them are banking on has roughly a 75% success rate at generating ANY kind of positive return.
Could the stock market in 2023 be primed for a year-end rally? It certainly could happen. The Fed pause and the cooler-than-expected inflation reading have brought the bulls back to the forefront over the past couple of weeks and it wouldn’t surprise me if that momentum carried forward into the new year. On the other hand, there are enough potential road hazards out there right now that it would be equally unsurprising if stocks tanked heading into 2024. We just honestly have no idea.
But here’s one thing I think I do know. That is that it would be unwise to try to apply historical precedent to a market environment that has featured anything but over the past 24 months. Seasonality might not matter a bit this time around.
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