According to the efficient market hypothesis, the stock market should not follow a predictable pattern. Stock prices reflect all available information, including expectations about future growth in stock prices. In other words, if everyone knows stocks move higher in December, then who will buy shares in January once the “known” rally is over? Somehow the “Santa Claus Rally” defies this logic. Simplifying the definition of this rally as the return on the S&P 500 for the month of December, in the past seventeen years stocks rose fourteen times an average of 1.8%. Amazingly, we see the same phenomenon in investment grade corporate bonds. In the past seventeen years (dating back to the earliest available data), investment-grade corporate bonds rose thirteen times, generating an average of 60 basis points excess total return above comparable credit-risk-free Treasury bonds during the month of December. The supposed seasonality in S&P 500 returns and corporate bond excess returns is probably coincidental, but some have guessed end-of-year tax-related portfolio adjustments (for instance, selling at a loss to offset income tax) or other fundamental drivers may be the reason for the season. Either way, we do not buy or sell assets simply because of the month and instead of making gimmicky bets focus on investing for the next several years. In doing so, we minimize transaction costs and the (admittedly) off-chance the Santa Claus rally skips a year.
Sources: Bloomberg, BAML fixed income indices, Business Insider, SNWAM Research calculations