Why December 2023 Was One of the Best Months for Stocks

As we enter December, the stock market is experiencing its best November in 50 years. The S&P 500 returned 8.9% in November, the third-highest return since the 10.3% return in November 1962. Since then, only 1980 (10.2%) and 2020 (10.8%) have been better for the index.

In fact, last month’s gains alone erased three months of losses, as November ended a three-month losing streak that saw the market down about 8.6% during that period. The S&P 500 index hit 4,594 on December 1, its highest since January 2022, when it hit an all-time high of 4,797.

The big question now is whether the market can maintain momentum in December, traditionally one of the best months of the year for stocks.

santa claus rally

Historically, December has been the best month for the stock market, along with April. According to CFRA Research, stocks have returned an average of 1.6% in December and April since 1945. Since 1928, the annual return in December has been 1.3%, followed by July (1.7%) and April (1.4%). , according to Yardeni Research.

There are many reasons why December was a strong month for stocks, one of the biggest reasons being the so-called ‘Santa Claus Rally’. Simply put, the holiday season is the biggest shopping month of the year, which benefits many businesses by driving more consumer spending. This also increases employment levels, with retailers expected to hire between 345,000 and 450,000 seasonal workers during the holidays. Increased hiring along with seasonal bonuses puts more money in consumers’ pockets.

This holiday season looks like it will be a good one. Holiday spending is expected to increase 3 to 4 percent in 2023, reaching a record total of $957 billion to $966 billion, according to the National Retail Foundation (NRF). Additionally, the projected increase is consistent with the pre-pandemic average growth rate from 2010 to 2019, NRF said.

Consumer spending isn’t the only factor that could contribute to the 2023 Santa Claus rally. Many institutional and individual investors rebalance their portfolios around this time of year. Some may want to cash out stocks they think have peaked and invest elsewhere, especially with many technology stocks overvalued after the Nasdaq’s 36% rise this year.

Others may engage in the practice of tax loss harvesting, which involves selling underperforming investments at a loss before the end of the year to reduce taxable capital gains and then reinvesting the money in other stocks. Some institutional investors may engage in a practice called “window dressing,” where they invest in high-performing stocks to better their year-end portfolios.

Others are just generally rebalancing. Simply because investor sentiment is typically high at this time of year, which tends to be bullish and fuel rallies.

What to expect this December?

The Federal Reserve always meets in December, but the Federal Open Market Committee (FOMC) meeting on December 12-13 will be of particular interest. The Federal Reserve paused interest rate increases at its last two meetings as inflation continues to fall. If this trend continues in December, the market will rise.

But the big indicator of what the Fed will do will come on Friday when the November employment report is scheduled to be released. The Fed wants inflation to cool, so it will look for jobs reports that suppress unemployment without overly increasing hiring.

Of course, it’s impossible to predict what will happen in the market at any given moment, but these averages and trends provide some context. No matter what happens in December, the month is only a short-term snapshot that will have little or no impact on longer-term market trends in 2024.