November finished with a bang and December is now upon us. One question I've been getting is, "So what will the market do in December?" One of the reasons for this question is because there's a lot of information that shows December is traditionally a very good month, and another is because we've just come off the best 3 consecutive days since March of 2009. If an investor is invested conservatively some are afraid they'll miss out on great returns this month due to those two factors.
That said, I thought I'd break down the facts about December to shine a little light on what may happen.
First, here's the stats on all Decembers using the S&P 500 as the stock markets barometer:
From this view it's easy to see why investors don't want to miss out on December's gains. It sure looks as close to a sure thing for investors as you can get. If only investing were this simple...
You see, when you further drill down December returns you start to find some very interesting (and conflicting) facts.
This year the S&P 500 was down roughly 1% as of November 30. So what I wanted to know was this, what usually happens in December when the first 11 months are negative. The results are a little shocking.
What I take away from this is that while December as a whole is usually very good for stocks, it's especially true when the market has already been going up for the year and not so much true when the market hasn't. It also makes me not worry one bit about being conservative during December even though those who are less informed might argue against it.
As for why this happens? My guess it that when people are generally optimistic for the year the become especially optimistic as it concludes. The same (but opposite) tends to be true when the markets have not been strong for the year. Another factor might be that when the market is going up everyone is chasing the returns hoping to make some good money to finish the year strong - so they put even more into stocks then normal; whereas when the market is down investors are more likely to sit out the rest of the year and wait for a fresh start in January.
Whatever the cause the facts are the facts. And these have been so consistent (the low standard deviation shows a lot of consistency) that it would actually be foolish to bet against them. Therefore the smart thing for investors to do is to remain cautious, balanced, and a bit conservative going into the finish of 2012.