Since 1950, December has proven to be the best month for the stock market. According to MoneyChimp.com, the S&P 500 has turned in an average gain for December of 1.62 percent, outpacing any other month. So far this December, Santa has left nothing but coal in the stock market’s stocking, with the S&P 500 losing more than 65 points, or about 3.77 percent, through Dec. 15. Not exactly anyone’s idea of a rally.
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No need to give up hope, though. Other definitions of the Santa Claus rally point to one particular week in December — the week between Christmas and New Year’s Eve.
But before you make a bet on whether we’ll have a rally this year, consider the following: The main driver for this uptick is the discovery of the so-called January effect. That theory holds that stocks, especially small companies, improve in January. So it may be the holiday rally is driven by investors buying stocks in December to reap the January gains.
The downside to this logic is that once a stock market pattern is discovered, it no longer works. So investors expecting a January rally drive stocks up in December betting on gains the following month. You see where this is going. Investors expecting a Santa Claus rally then start buying stocks in November. I’ll call it the Thanksgiving rally. As it happens, the S&P did gain 2.45 percent in November.
Now if I really believed I had discovered a new pattern of November stock gains, the last thing I would do is write about it and spark a trend that would disappear as soon as investors started buying stocks in October.
Sorry to be a Scrooge, but as much as I would love to believe in either Santa Claus or the January effect, a far more likely explanation is that we are finding patterns out of randomness. Will there be a Santa Claus rally in the next two weeks? Being a good investor is knowing that we don’t know.
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While far less exciting than timing markets, picking an asset allocation of low-cost index funds and sticking to that allocation is the better way to go. A boring Lazy Portfolio is likely to be far more profitable and give you far more time to enjoy the holiday season.
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