December: Is Santa good to good markets?

December consistently ranks as one of the best performing months for major stock indexes. It is the second best performing month for the Dow Jones Industrial Average and Nasdaq Composite and best performing month for the S&P 500 (see “Vital statistics”). The so called Santa Claus rally is often attributed to end of year portfolio rebalancing and window dressing, where mutual fund managers make sure the best performing stocks are included in their portfolio even if they missed the moves.

But when we dug a little deeper into the data we found something interesting. Of the 10 best performing years for the S&P 500, only three of those years where included in the top 10 best Decembers. And in the top years of 1954 and 1958 for stocks, the performance in December were only ninth and tenth best. Currently both the Dow and S&P 500 are up more than 10% year-to-date. So in very positive years you don’t necessarily see the window dressing effect. Perhaps managers don’t need to dress up their portfolio if they are earning real returns.

The Nasdaq has the highest returns for December of the three major indexes and although the percentage of up months vs. down months is lower for the Nasdaq than the Dow and S&P 500, it has produced three double-digit returns in December and no double-digit drawdowns in December.