A Santa Claus Rally Swells Stock Gains for the Year
And: does the stock market typically do better in December?
Greetings and Merry Christmas, friends. I hope everyone has a peaceful and happy holiday. I just have a quick piece today amid the hubbub and frenzy of a busy week, especially here in Maine, where many of us lost power for 2+ days after a surprisingly potent wind and rain storm on Monday. Some people are still without power nearly a week later. I am reminded of a Mitch Herburg joke about a duck’s opinion of you being very dependent on whether you have bread. In the days after a storm, a person’s opinion of the utility company is highly dependent on whether they have power. Anyway, I hope people are able to find light and warmth one way or another this season. And hey, as of Friday, the days are starting to get longer again. Spring will be here before we know it.
The stock market knocked off its eighth straight week of gains on Friday, which is the longest such streak since 2017. Since their October lows, the S&P 500 and Dow Jones are both up about 15% while the tech-heavy NASDAQ is up 19.1%. The Russell 2000, which is an index of smaller companies, is up over 24% during that time. Of particular note to people with an eye on the banking sector, an index that tracks regional bank stocks is up about 33% since October 27th (ticker symbol: IAT). What makes these gains all the more impressive is that they come at the tail-end of an already-good year: the S&P 500 is up 24% for the year (including the recent gains) while the NASDAQ is up a whopping 43%!
What in the name of the North Pole happened? There is an old expression in investing of you can’t fight the Fed. As the Fed ratcheted up interest rates steadily and sharply in 2022, stocks were battered; the S&P 500 was down 20% for the calendar year in 2022 and the NASDAQ was down 32%. But now the inverse is happening; as the Fed has reversed course, it has provided a boost to stocks with tailwinds to boot.
The specific inflection point for the Santa Claus rally we have seen to end the year was the Fed’s decision to not increase interest rates again the first week of November with the ancillary assumption at the time that it would also probably not increase rates in December, which proved to be true. Investors took this information and ran with it. Money poured into stocks and has not stopped since. In fact, a popular S&P index fund with the ticker symbol SPY has attracted $40 billion in funds in the month of December along, include $20 billion this past Monday, which was the single biggest day of inflows to that fund in its history (the fund was started in 1993).
Where is this money coming from? Well, a lot of it is coming out of bonds funds. With a belief that interest rates are almost certain to drop in 2024 and, with them, yields on fixed-return investments will also decline, money has been pouring of bonds and into stocks. This includes treasuries, which have declined in yield pretty significantly over the past month and a half: at the end of October, the annual yield on a 10-year treasury was 4.9% and today it is 3.9%, which may not sound like a big change, but in such a short period of time it actually is.
What to Make of It
The end-of-year stock market surge is certainly good news for investors. It is also particularly important for non-profit organizations with invested reserves or capital accounts that are invested in risk-bearing assets. Those organizations are seeing a swelling of their assets right now just from the investment gains.
Lastly, it is, in fact, good news for many (though not all) ordinary Americans. The percentage of Americans who are invested in the stock market in one way or another stands at 61% according to a recent Gallup poll. Many of these investments are through workplace retirement plans like 401(k)’s and 403(b)’s plus personally-held Individual Retirement Accounts, all of which have increased in value substantially over the past two months (assuming they are invested properly).
It is worth mentioning, of course, that focusing too heavily on stock market returns can belie the fact that the economy is experienced in a much different way by Americans with assets to invest compared to those without. Those 39% of Americans who are not invested in the stock market have, needless to say, missed out on the recent gains. The gap between rich and poor widens when those who with invested assets see further wealth gains from compounding interest while many others miss out. This is one reason why we are starting to see more retirement plan rules require that employees are defaulted into the plan rather than individuals having to self-select in; when employees are automatically enrolled, participation is much higher and the benefits of all of that compounded growth over time accrue to more Americans.
Does the Stock Market Do Better in December?
Markets are difficult to predict. Timing is hard to get right with any percentage better than what would be achieved by ordinary luck. I am inclined to think that any difference in monthly performance (i.e. comparing a typical month of December vs. a typical month of June, for example) is probably more likely a result of the oddities of limited sample sizes or the skewing of the dataset by particularly outlier individual months of the past rather than being based on actual meaningful trends. Nonetheless, via The Robust Trader based on data from 1950 to 2017, it does seem that December outperforms the overall market at least over that time frame. Why? Who knows. Maybe it is the positive feelings and general buoyancy people feel at the end of the world, or perhaps (more likely), it is just a fluke.
I do plan to come back to many of the usual themes about the economy in the weeks ahead as we look to 2024. For now, thank you for reading and for being a part of The Sunday Morning Post community and have a wonderful and relaxing holiday and a nice wind-down to the year.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com.
Merry Christmas and Happy Holidays from our family to yours!
