At this time of year, my 9 year old excitedly polishes his boots so that, according to Hungarian tradition, Santa can fill them with sweets and toys during the night between December 5 and 6 (yes, he does arrive a few weeks early in Central Europe). Just like in years past, I am sure he won’t be disappointed. But will Old Saint Nick have any goodies for equity investors too?
History suggests that there is at least some evidence supporting the idea of a “Santa Claus Rally.” We call our light-hearted measurement of choice the “Santa Score,” which we define as the ratio of a market’s average performance in the month of December to its total return in the corresponding year. Since there are 12 months in the year, a Santa Score of one-twelfth (around 0.08) would indicate that December had an average impact on the year’s total return. A Santa Score above 0.08 indicates that December was a better month for stocks, on average, than the other 11 months of the year.
As it turns out, all 12 market segments that we selected for our analysis fared well on the test. The Santa Score’s cross-market average of 0.23 indicates that since 1994, December, on average, has been about three times more profitable than other months. Having said that, there have been significant differences across various regions: Japanese investors usually had a happy and profitable December, with the last month of the year producing, on average, five times the return of the average month; meanwhile in Canada, December returns have tended to be only slightly above average. It is also notable that Santa was somewhat stingier in the past decade than in the previous two: the December average return in the last 10 years was significantly lower than in the prior 18 years, with 3 out of 12 market segments surveyed delivering an outright negative average return in the Decembers between 2013 and 2022.
Santa is known to reward nice children with candies but to leave coal for the naughty. Does he do something similar for equity markets? As Exhibit 2 shows, he does indeed. Historically, the average equity performance during December tends to be much better when the previous 11 months’ return was positive (“nice”) than when it was negative (“naughty”), with the spread widest in Canada, at 5.2%. The only exception is U.S. small caps, which tends to benefit from a January effect instead.
Looking at YTD returns, the good news is that all market segments besides Hong Kong have been nice so far in 2023—let’s hope Santa takes notice. But regardless of where markets head in the next few weeks: Happy holidays and a prosperous New Year to all!The posts on this blog are opinions, not advice. Please read our Disclaimers.