There’s a seven-in-10 chance that U.S. stocks will rise in December. While that may appear to be a prediction that the bull market will continue for at least another month, it actually reflects the odds that exist every year.
Regardless of whether we’ve been in a bull or a bear market, the Dow Jones Industrial Average
DJIA
in December rises about 70% of the time. Furthermore, those odds aren’t significantly affected by whether the stock market is overvalued, as it is currently according to any of a number of indicators.
These odds are summarized in the accompanying chart, which is based on the Dow’s performance since its creation in 1896. None of the differences between the chart’s various columns is significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine.
To illustrate how we gain no insight into December’s direction from what came prior, consider the following examples:
- In 2000, the year in which the internet bubble burst, the market’s year-to-date return through November of that year was dismal — a loss of around 10%. And yet in December the Dow gained 3.6%.
- But the market hasn’t always bounced back in December in years with terrible returns through November. Last year, in 2022, the market suffered a nearly 5% decline through Nov. 30, and the Dow fell an additional 4.2% in December.
- Years in which the market is posting a gain through November are no different. In 2007, for example, the Dow’s year-to-date through November was a gain of 7.3%, and yet in December it lost 0.8%, as the 2007-2009 bear market was beginning.
- But the market hasn’t always fallen during years in which the Dow rose through November. In 2021 the Dow rose 12.7% through November and gained an additional 5.4% in December.
Here comes Santa Claus
You may wonder what these results mean for a possible “Santa Claus Rally.” The answer is they have little bearing, since the only Santa Claus Rally that truly exists only takes place over the last few trading sessions of December. Though the market does have a statistically significant upward bias during those sessions, that bias isn’t large enough to make the entire month’s odds of winning statistically significant.
The bottom line? As always in a market as efficient as Wall Street, December’s direction will be a function of whether developments turn out better or worse than what is the current consensus expectation. It’s anyone’s guess, since if we had advance knowledge, then stock prices would already reflect that information.
This is why macroeconomic forecasting is so difficult. As I wrote earlier this week, hedge funds that focus on macro forecasting have, on average, done only half as well as the S&P 500
SPX
over the past decade, and even worse than hedge funds which don’t rely on macro forecasting.
Read: Deutsche Bank makes the highest S&P 500 forecast on Wall Street — and says that may be too conservative
This isn’t as depressing as it might seem. Because the future is so uncertain, the stock market’s odds of rising must be high enough to incentivize investors into incurring that risk. That’s the real reason why there’s a seven-in-10 chance the stock market will rise in December.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected]
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