Market Health

Will These Optimistic Markets Continue in December?

November was a record-setting month for stocks.

Yes, the Dow Jones Industrial Average, Nasdaq and S&P 500 rallied to new all-time highs. And the shortened trading week for Thanksgiving was another big winner. But the U.S. indexes weren’t the only ones to surge higher in the past month.

The iShares MSCI World ETF (NYSE: URTH) gained nearly 13% in November.

And that was led by exceptionally strong performances from France’s CAC 40, which rallied more than 20% in the month, and Italy’s FTSE MIB Index, which shot up nearly 25%.

Global Indexes vs DJI

It was a blockbuster November for stocks worldwide following the U.S. presidential election, as well as a bevy of COVID-19 vaccine news.

Now the question is… will this party continue?

Wall Street’s Fortune Cookie

There’s a timeless piece of fortune-cookie wisdom on Wall Street: The trend is your friend.

It’s been parroted for so long that its origins are lost to the mists of time.

But it’s the No. 1 rule of investing.

Well, trends are our best friends, because that’s what we focus on.

Over the past couple of months, we warned that the markets often see a sell-off in October during election years (which unfolded), followed by a very strong bounce higher in November (which also took place).

But the strength goes beyond that.

In fact, all the way back in September, we emphasized that we were heading into what are traditionally the strongest three months of the year for the markets.

October, despite its preelection volatility, is the beginning of a consumer spending splurge. No matter what you tell your children and grandchildren, all of those presents under the Christmas tree aren’t free. Celebrants in the U.S. typically drop more than 1% of their annual incomes on holiday gifts.

This is the rocket fuel stocks need to end the year strong.

And after Halloween is quickly packed up and put away so lawns and store aisles can be crammed with holiday decorations, the markets take off. This trend is so ingrained that the Dow hasn’t ended the month of November lower than where it began since 2012. That’s eight consecutive years of gains. And since 1985 – for 35 years – November has averaged as the second-best-performing month of the year.

DJI Average Monthly Gain since 1985

Not only is April the best month for stocks over the past three decades, but the Dow hasn’t ended the month lower since 2005.

Plus, December is third in monthly performances. And that’s what investors need to keep in mind.

The Final Countdown

At times, December can be a tricky month for the markets.

There can be some softness in retailers in those last hours before the big day – December 25. But we often see a relief rally afterward, and the final tally is nowhere near as bad as expected.

But massive December meltdowns aren’t common.

In recent memory, we had the abysmal December of 2018. It was the worst December since 1931. And it included the worst Christmas Eve trading session ever. It was a bitter end to the worst year for the markets since 2008.

It seems like ancient history, but then the U.S.-China trade war was in full swing, triggering a slowing economy.

But realistically, those performances in December are rare.

Since 1985, the Dow has ended the final month of the year in the red on nine occasions. That’s only 25.7% of the time. And just four of those saw pullbacks of 1% or more.

  • 2018: -9.51%
  • 2002: -6.30%
  • 2015: -1.66%
  • 1996: -1.11%

So the trend is our friend here. Bear markets don’t begin in December. They begin either a few months earlier or a few months later when fourth quarter results are posted.

Now, as expected, in-store sales this holiday season have cratered. That shouldn’t be a shocker. But online sales are skyrocketing to new all-time highs. So, despite the surge in COVID-19 cases, consumers are still shopping for the holidays.

And I think we’re still in for some upside here, despite what the bleeding headlines might shout.

Thirty-one days… That’s all that’s left in 2020.

That’s it.

This year, which will likely be a form of curse or exasperation in the future (#2020), is rapidly coming to a close.

But historically, these final weeks of the year have been some of the best days for investors. That means there’s still plenty of fuel left in the tank for even more holiday cheer… pandemic or not.

Here’s to high returns,

Matthew