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December, fairest of them all
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December 3, 1999: 5:40 p.m. ET
The end of the year produces the best returns for investors, so hop in
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - If the bulls are loose on Wall Street, it must be December.
After getting off to a slow start earlier in the week, the stock market roared back with a vengeance Friday, with Nasdaq’s composite index and the S&P 500 pushing through records and the Dow Jones industrial average gaining nearly 250 points.
Sure, there was good economic news to boost stocks. Yes, technology stocks were coming off a tumble. But, whether it's superstition or good long-term forecasting, you have to wonder if December isn’t starting to live up to its reputation again.
It might be getting cold outside, but the last month of the year is hot for the markets. In fact, December has been the top-performing month for U.S. stocks since 1950, producing an average increase in the S&P 500 of 1.8 percent. A fluke? Not really. The next-best months are November and January, at 1.7 percent. Those are all double the average monthly returns.
"Three months stand out very sharply from the rest,” said Yale Hirsch, head of the Hirsch Organization and editor of the Stock Trader’s Almanac. Include March and April, throw in the rather disappointing month of February, and "you have six powerful months that are far superior than the other six,” he said.
In fact, if you had invested $10,000 in 1950 and kept it in the S&P 500 only from November through April, that would have netted you $340,250. The same amount of money in the same stocks but from May through October would have netted you $11,138.
Nice trivia, but what good is it to me, you might be tempted to ask? This is the here and now, and some investors might, every now and then, have heard that past performance is no guarantee of future results.
Actually the December blast and good end of the year returns are far from freakish anomalies. And it sure beats than using the Superbowl winner as your forecasting tool.
"It’s no guarantee, but it’s not nonsense,” said John Manley, investment strategist for Salomon Smith Barney. There is a number of reasons why December tends to bring more than just Christmas and Hanukkah presents for investors.
At the end of the year, Manley pointed out, there’s a lot of money flowing into the stock market as late comers rush to make the most of IRAs and 401(k)s, opening them and funding them. At the start of the next year, the smart money is getting in as early as it can, and companies fund pension plans and 401(k)s, explaining good January performance, too.
Bonus checks keep the pump primed
And although the markets anticipate the Christmas shopping season, Hirsch said, they don’t always allow for the fact that many businesses start a new cycle in September. Companies borrow heavily to support the selling season, and the markets start noticing the payoff in November.
There are other factors to consider - cash bonuses start getting hashed out and given out in December, especially on Wall Street. That money has to go somewhere, and much of it ends up back in stocks.
And there’s a lot of "window dressing” from mutual-fund managers in December, Hugh Johnson, chief investment officer of First Albany, pointed out. Managers buy into the best-performing stocks of the year and sell their dogs, "so they can say they’re fully invested and in the right stocks.”
As a result there’s a corresponding "January effect.” After the fund sell-off, investors realize some of the wrong stocks got sold and snap up bargains that December did wrong.
The great end-of-the-year performance is helped by the fact that the market is coming off the summer doldrums and its worst month, September. There are numerous factors explaining why the summer does so poorly, too, Manley said.
But chief among them are that many mutual funds restructure their portfolios then and close out their books that month. Also, many people come back from summer vacation and seem to lose a little heart that there are few new business initiatives and get depressed about prospects for the next year.
"In the summer, people seem to get concerned,” Hirsch agreed. "When they come back in the fall, panic sets in and it seems to go a little far.” Bear markets have almost always bottomed out in October as a result, he noted.
Market timing can be tricky
Most investment advisors warn individual investors not to try to hop in and out of the market based on short-term fluctuations, a strategy known as market timing. But the historic patterns are undeniable, and since some of them stem from the calendar system, they’re unlikely to change before that does.
Manley advises investors to hold stocks longer than a year anyway, which would mean they ride out the vicissitudes of the good, bad and downright ugly months. But he’s not averse to a degree of market timing. "It’s just hard to do,” he said.
One reason is that investors are nearly always looking for certain stocks, which may or may not follow the same path as the market overall. In general, though, if you want to own a stock in July or August, there’s probably no real rush to get into it, he said.
And don’t get shaken up unduly by a bad September. If you are on the hunt for a particular stock and you see it get hammered in September or October, "it could be a time to buy,” Manley said.
Still, he noted that there are factors beyond the positive effects seen in a typical December that played into Friday’s rise. "There’s a lot of fear in the market,” he said. Inflation fears abated again thanks to the November employment report. "We saw that unwind today, almost a decompression of it,” he said.
If you insist on market timing, sell in the summer and buy on Dec. 1, and see if it works, Johnson said. Then call him back. "For every scheme I’ve been presented with in my life ... I’ve said try it and see if it works. Usually I don’t hear from that person,” he said.
Y2K is a wild card this year
This year is not average because the effect of Y2K has to be allowed for. There’s been wide speculation that investors will hold off putting new money into the market until after the end of the year. That would then, the theory runs, be followed by a "meltup” in January, as money comes into the market.
"I wonder if maybe the meltup isn’t occurring early,” Dick McCabe, chief market analyst for Merrill Lynch said. "People have put aside their fears of any great catastrophe in January, and since there’s been a lot of talk, maybe there’s been a lot of preemptive buying.”
Far from catastrophe, the averages suggest that this is the time to buy and that January will again bring warmth and sunshine into investors hearts, or portfolios at least. But those are the averages.
"I can plan a vacation in San Diego knowing the sun shines 325 days of the year and it still rain when I get there,” Manley said. 
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