Traditionally, the month of December has been a great time to own North American equity securities. According to EquityClock.com , the S&P 500 index gained an average of 1.50 per cent per period during the past 20 periods and has been profitable 80 per cent of the time. December has been the third-best performing month of the year. Returns are better for the TSX composite index. Average gain per period during the past 20 periods was 2.30 per cent and the trade was profitable 85 per cent of the time. December has been the top performing month in the year for the TSX composite index.
A closer look at the data for the past 20 periods paints a slightly different picture. Gains during the month are heavily loaded in the last two weeks of the year. From December 15 to January 3, the S&P 500 index gained an average of 2.20 per cent per period and was profitable 80 per cent of the time. The TSX composite index advanced an average of 2.89 per cent per period and was profitable 90 per cent of the time. Both the S&P 500 index and the TSX composite index were essentially unchanged, on average, in the first two weeks in December. With random returns in the first half of the month, waiting for start of the “Santa Claus rally” from December 15 through to the first couple of trading days in January usually is a good strategy for equity investors at this time of the year.
Strength in equity markets in December is prompted by a series of annual recurring events. The logical reason that most analysts mention is a jovial mood held by investors during the holiday period. The low volume, low volatility trade results in a drift higher for stock prices. A second recurring event is the chase for performance into the end of the year. Hedge funds have largely underperformed their respective benchmarks this year and pressures are elevated to add value into the remaining days of the quarter and year. A third event is initial publishing of company estimates for another year. Estimates for 2015 are rolled out to supplement estimates for 2013 and 2014. Analysts frequently upgrade targets and recommendations during this period to reflect higher estimates. A fourth event is year-end tax considerations. Focus during the first half of the month is on selling equities at a loss to offset taxable capital gains realized during the year. In the second half investors often find value in the beaten-up names that had been pressured lower earlier in the month. A fifth event is anticipation of fourth-quarter and annual results released in January. Chief executive officers love to give shareholders good news before they face shareholders at their annual meeting by announcing new investment plans, dividend increases, share buybacks, and stock splits with their fourth quarter report.
Several special non-recurring events are expected to impact North American equity markets this December. Tax-related transactions are less significant this year. Prices of most North American equities are higher and are not candidates for tax loss selling. A notable exception is the gold equity sector, which likely will remain under tax selling pressures in the first half of December.
Anticipation of share buybacks, when fourth-quarter and annual results are released, is a more significant event. Shareholders of North American companies with large and growing cash positions are encouraging chief executive officers to announce their intentions for investment. Chief executive officers have been reluctant to use funds to expand production and services due to an unstable U.S. fiscal environment. Recently, major companies such as IBM, Cisco, and Yahoo have chosen to use parts of their cash to increase their share buyback programs. Corporations are holding back decisions on cash investments prior to results of a third non-recurring event, the Congressional Budget decision. Lawmakers must present a budget by Dec. 13 and must approve a budget by mid-January or face another U.S. government shutdown. Law makers on both sides of the aisle are under significant pressure to reach an agreement despite their political differences. Even a minimal agreement will be greeted favourably by equity markets.
Meanwhile, a fourth non-recurring event is waiting for results from the third event. The U.S. Federal Reserve is waiting on a budget decision by Congress before adjusting the $85-billion (U.S.) per month “quantitative easing” program. Approval of Janet Yellen for Federal Reserve chairman when Congress returns from its Thanksgiving break on December 9 is likely to be greeted favourably by equity markets.
Sectors that perform best in the month of December include economically-sensitive sectors, such as Industrials, Consumer Discretionary, and Materials. However, as noted, their performance during the first half of the month is variable. Mind the gap!
Don and Jon Vialoux are the authors of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. They are also research analysts at Horizons Investment Management, offering research for the Horizons Seasonal Rotation ETF (HAC-T). All of the views expressed herein are their personal views, although they may be reflected in positions or transactions in the various funds managed by Horizons Investment. Horizons Investment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://TimingTheMarket.ca/ and http://EquityClock.com.