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Decembers to remember: Short days, long nights, big gains

December might hold the year's darkest days, but it can be the brightest time for investors.

So says probability, anyway.

Maybe it's holiday cheer; or, maybe, it's optimism as investors start projecting a full year ahead instead of worrying about closing out the current year. Either way, for the last 112 years, the month of December has delivered the most frequent gains – and best returns – on the Standard & Poor's 500 index.

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On average, it's gained 1.4 per cent across all Decembers since 1900, versus a total monthly average gain of just 0.6 per cent. But, says Sam Stovall, S&P Capital IQ's chief equity strategist, "the most compelling reason for being optimistic about the market's potential performance in December, in my opinion, is its frequency of advance."

Over the course of all Decembers since 1900, the S&P 500 has gained 69 per cent of the time, Mr. Stovall wrote in a report released this week discussing December's curious pop. Taken from later baselines, the numbers look even better: Since 1945, it's gained 78 per cent of the time; and since 1990, it's gained 82 per cent of the time.

Compare that to the frequency of gains across all months of the year for the same durations: 58 per cent since 1900; 59 per cent since 1945; and 62 per cent since 1990.

In other words, not only is December more likely to outperform monthly average performances on the S&P 500, but the odds of getting returns are about four in five – at least in recent years. That's a pretty good gamble for investors who might be looking for some small returns this month to cover the cost of the holidays.

Investor confidence reflects the index's performance, too. Since 1987, the American Association of Individual Investors has conducted weekly surveys asking its members how stock prices will perform over the following six months. On an average week, 39 per cent of its member investors are bullish on the markets. But when you break that survey down by month, investors are more likely to be bullish in – wait for it – December. When surveyed in the final month of the year, nearly 42 per cent of investors expect stocks to rise.

Of course, with 500 companies in the S&P 500, investors looking to get the best returns will want to look deeper. Since 1971, the index's materials sector has been its biggest overachiever in the twelfth month, gaining 2.5 per cent on average. The next-best performers were the industrials sector and telecom services.

While all of the index's component sectors perform best in December, sharp investors might as well weed out known underperformers, including the IT sector and consumer staples.

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Short days might make for a long December, but with stock performances like this, there's reason to believe investors can stay positive at year's end.

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