December is the number three Dow Jones Industrials and S&P 500 month since 1950, averaging gains of 1.6% and 1.5% respectively. It’s also the third-best NASDAQ (since 1971) month. It is the second-best month for Russell 2000 (since 1979). The market rarely falls precipitously in December and a repeat of 2018 does not seem highly likely this year. In 2018, DJIA suffered its worst December performance since 1931 and its fourth worst December going all the way back to 1901. When December is down it is usually a turning point in the market—near a top or bottom. If the market has experienced fantastic gains leading up to December, stocks have consolidated in the first half of the month.
![[Election Year December Performance Table]](/UploadedImage/AIN_1224_20241126_December_Election_Year_mini_table.jpg)
In the last eighteen election years, December’s ranking changes modestly to #2 for DJIA and S&P 500, NASDAQ’s slips to fifth place. Small caps, measured by the Russell 2000, have had a field day in election-year Decembers. Since 1980, Russell 2000 has lost ground just once in eleven election-year Decembers. The average small cap gain in all eleven years is a solid 3.5%. The Russell 2000’s single loss was in 1980 when the Prime Rate was 21.5%.
![[December Seasonal Pattern Chart]](/UploadedImage/AIN_1224_20241126_December_Seasonal.jpg)
Trading in December is holiday-inspired and fueled by a buying bias throughout the month. However, the first part of the month tends to be weaker as tax-loss selling and yearend portfolio restructuring begins. December’s first trading day leans bearish for S&P 500 and Russell 1000 over the last 21 years. A modest rally through the sixth or seventh trading day also has fizzled going into mid-month. It is around this point that holiday cheer tends to kick in (and tax-loss selling pressure fades) propelling the indexes higher with a pause near month-end. Election year Decembers follow a similar path, but with noticeably larger historical gains in second half of the month by Russell 2000.
Small caps tend to start to outperform larger caps near the middle of the month (early January Effect) and our “Free Lunch” strategy is served from the offerings of stocks making new 52-week lows on Quad-Witching Friday. An email Issue will be sent prior to the market’s open on December 23 containing “Free Lunch” stock selections. The “Santa Claus Rally” begins on the open on December 24 and lasts until the second trading day of 2025. Average S&P 500 gains over this seven trading-day period since 1969 are a respectable 1.3%.
This is our first indicator for the market in the New Year. Years when the Santa Claus Rally (SCR) has failed to materialize are often flat or down. Six of the last seven times our SCR (the last five trading days of the year and the first two trading days of the New Year) has not occurred were followed by three flat years (1994, 2004 and 2015) and two nasty bear markets (2000 and 2008) and a mild bear that ended in February 2016. Santa’s no show earlier this year was likely due to temporary inflation and interest rate concerns that quickly faded. As Yale Hirsch’s now famous line states, “If Santa Claus should fail to call, bears may come to Broad and Wall.”
December Quad Witching Week is more favorable to the S&P 500 with Monday up fifteen of the last twenty-four years while Quad-Witching Friday is up twenty-six of the last forty-two years with an average 0.18% gain. The entire week has logged gains twenty-nine times in the last forty years. The week after December Quad Witching is the best of all weeks after Quad Witching for DJIA and is the only one with a clearly bullish bias, advancing in thirty-two of the last forty-two years. Small caps shine especially bright with a string of bullish days that runs from December 18 to 24.
Trading the day before and the day after Christmas is generally bullish across the board with the greatest gains coming from the day before (NASDAQ up thirteen of the last seventeen). On the last trading day of the year, NASDAQ has been down in eighteen of the last twenty-four years after having been up twenty-nine years in a row from 1971 to 1999. DJIA, S&P 500, and Russell 1000 have also been struggling recently and exhibit a bearish bias over the last twenty-one years. Russell 2000’s record very closely resembles NASDAQ, gains every year from 1979 to 1999 and only six advances since.