December Almanac: Small Cap Effect & Santa Claus Rally

Trading in December is holiday inspired and fueled by a buying bias throughout the month. However, the first part of the month tends to be weaker as tax-loss selling and yearend portfolio restructuring begins. Regardless, December is laden with market seasonality and important events.

December is the number three S&P 500 and Dow Jones
Industrials month since 1950, averaging gains of 1.5% on each index. It’s the second-best
Russell 2000 (1979) month and third best for NASDAQ (1971) and Russell 1000
(1979). In 2018, DJIA suffered its worst December performance since 1931 and
its fourth worst December going all the way back to 1901. However, the market rarely
falls precipitously in December and a repeat of 2018 is not all that likely.
When December is down it is usually a turning point in the market—near a top or
bottom. If the market has experienced fantastic gains leading up to December,
stocks can pullback in the first half of the month.

In the last seventeen post-election years, December’s
ranking slip to #7 S&P 500, #7 NASDAQ and DJIA #5. Small caps, measured by
the Russell 2000, tend to have a field day in post-election-year Decembers.
Since 1981, the Russell 2000 has lost ground three time in ten post-election
years in December. The average small cap gain in all ten years is a solid 2.2%.

Small caps tend to start to outperform larger caps near the
middle of the month (early January Effect) and The “Santa Claus Rally” begins on the open on December 27 and lasts
until the second trading day of 2022. Average S&P 500 gains over this seven
trading-day range since 1969 are a respectable 1.3%.

when the Santa Claus Rally (SCR) has failed to materialize are often flat or
down. The last six times SCR (the last five trading days of the year and the
first two trading days of the New Year) has not occurred were followed by three
flat years (1994, 2004 and 2015) and two nasty bear markets (2000 and 2008) and
a mild bear that ended in February 2016. As Yale Hirsch’s now famous line
states, “If Santa Claus should fail to call, bears may come to Broad and Wall.”

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