How kind are indices to investors in December?

For years I, like many (and without doing the analysis to either confirm or deny it), have traded under the perception that December was more often than not a good month for investors.

A NYSE trader
Source: Bloomberg

When thinking about it there are a number of reasons why this could be true. Because of additional funds that come into the markets in January a pre-emptive rally in December would be logical ahead of this, as the ‘savvy crowd’ try to beat the post-Christmas surge. In the last few weeks of the trading year a late rush of trades can be required to be completed before the end of the year for legal or tax reasons. 

Having ‘sold in May’ fund managers might well be tempted to rebalance their exposure by moving out of cash and into equities to help their year-end performances. Any one or all of these could be the reason for the belief, but do the figures back it up?

In order to spread the responsibility I decided to look at how the FTSE, DAX and S&P 500 all behaved in the month of December over the last decade.

In short Yes! Even if the gains aren’t stunning the data shows that December is not kind to the bears. Over the last decade all three indices have risen 27 times out of 30. So 90% of the time we have seen markets climb over the course of December. It is also worth noting on one of the three occasions where this was not the case the S&P 500 closed the month just one point or 0.09% lower.

The FTSE has closed higher in December over the last decade with an average move of 2.68%. In 2010 we saw its best move as it rose by 6.72%, while in 2007 it rose by just 0.38%.

Over the last ten years the DAX has risen by an average of 2.78%. The year 2009 was its best year as it closed up 5.89% but in 2011 it fell by 3.13%, the most of any of the analysed time periods.

The weakest performer of the three indices is the S&P 500, closing higher in eight of the ten years giving it an average move of 1.66%. Like the FTSE 2010 was its best year after it closed up 6.53%, while the fall in 2007 of 0.86% was its worst return.  

Year-end optimism might have a lot to do with the performance. Fund managers are, surprisingly, human like the rest of us. With a new year looming they can hardly be blamed for wanting to look on the bright side. When the big players in the market commit themselves in such a big way, retail investors can hardly be blamed for following the herd and heeding the lessons of the past.

December performance chart

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