Why December 2023 Has Been One of the Best Months for Stocks

As we enter the month of December, the stock market is coming off one of its best Novembers in 50 years. The S&P 500 returned 8.9% in November, which is the third-best result since 1962, when it returned 10.3% in November. Since then, only 1980 (10.2%) and 2020 (10.8%) were better for the index.

In fact, November ended a three-month losing streak that saw the market drop by about 8.6% over that stretch, so last month’s gains alone wiped out three months of losses. The S&P 500 stood at 4,594 on Dec. 1, marking its highest total since January 2022, when it hit an all-time high of 4,797.

The big question now is whether the market can maintain its momentum in December, which has traditionally been one of the best months of the year for the stock market.

Santa Claus rally

Historically, December has been the best month of the year for stocks, along with April. According to CFRA Research, stocks have recorded an average return of 1.6% in December and April going back to 1945. Since 1928, December has seen an annual return of 1.3%, which trails only July (1.7%) and April (1.4%), according to Yardeni Research.

There are several reasons why December has been a strong month for stocks, and one of the major ones is the so-called “Santa Claus rally.” Quite simply, the holiday season is the biggest shopping month of the year, and that fuels more consumer spending, which helps a lot of businesses. It also leads to higher employment levels, as retailers are expected to hire between 345,000 and 450,000 seasonal workers over the holidays. The increased hiring, along with seasonal bonuses, puts more money in consumers’ pockets.

This holiday season is shaping up to be a good one. According to the National Retail Foundation (NRF), holiday spending is expected to increase by 3% to 4% in 2023 to between $957 billion and $966 billion, which would be a record total. Further, the projected increases are consistent with the average pre-pandemic growth rates from 2010 to 2019, said the NRF.

Consumer spending is not the only factor that may contribute to the Santa Claus rally in 2023. A lot of institutional investors and individual investors rebalance their portfolios this time of year. Some may cash out of stocks they believe may be peaking, especially this year with many overvalued technology stocks out there following the 36% run-up in the Nasdaq, and invest elsewhere.

Others may engage in the practice of tax-loss harvesting, which involves selling an underperforming investment at a loss before the end of the calendar year to reduce taxable capital gains and then reinvesting that money in other stocks. Some institutional investors may also engage in a practice called “window dressing” by investing in high-performing stocks to make their year-end portfolios look better.

Others are just rebalancing in general, simply because investor sentiment is typically high this time of year, so they tend to be bullish, fueling the rally.

What to expect this December

The Federal Reserve always meets in December, but the upcoming Federal Open Market Committee (FOMC) meeting on Dec. 12-13 will be of particular interest. The Fed has paused rate hikes over its last two meetings as inflation continues to tick down. If that trend continues in December, it should boost the markets.

However, a big indicator of what the Fed might do comes Friday, when the November jobs report is due to come out. The Fed wants to see a cooling of inflation, so it will be looking for a jobs report that keeps the unemployment rate in check without an excessive increase in job openings.

Of course, it is impossible to predict what will happen in the markets at any given time, but these averages and trends provide some context. Regardless of what happens in December, a single month is merely a short-term snapshot that will have little or no bearing on the longer-term market trends in 2024.