Because December is traditionally a very good month for European equities.
And the better the year, the better the December, according to the kitten-cuddling bank.
Here’s the basic idea from Goldman Sachs’ European equity strategy team:
Recently, there has been a lot of talk in the investor community about de-risking and investors locking in their performance for the year. This has resulted in more bearishness going into the year end, as many have questioned the potential for further market upside based on the sustainability of the economic recovery.
A seasonal analysis conditional on year-to-date performance tells a very different story. The better the performance has been from January to November, the more positive the return has tended to be in December.
We believe that this year is likely to exhibit a similar pattern. The market is up around 25% since the beginning of the year and we believe that the aforementioned concerns, although important, should not drive the market down. From recent conversations with clients, we have the feeling that most of them are at best neutral. Valuations are still supportive and, if the market makes more progress, there will be more pressure on investors to increase positions going into the year end.
In fact, Goldman has looked at monthly data going back to 1974 and found that December has on average returned twice as much as the monthly average for the whole year (1.7 per cent versus 0.8 per cent.) It’s the third best month based on average data — after January and April. Here’s the chart:
And using median data:
Despite these encouraging results, one has to be cautious when using averages. Large outliers can distort the number and hide a very different underlying picture. This is why we have also calculated the median for each month back to 1974. Even then, the results are supportive of positive seasonal effects in December, January and April. More broadly, the first quarter seems to benefit more from a seasonal effect. Furthermore, in general, there seems to be six-month dynamic where 4Q and 1Q are strong whereas 2Q and 3Q are weaker, supporting the adage “Sell in May and go away”.
However, if you look at more recent numbers (from 2000 onwards) the seasonal pattern — with the exception of a strong April — goes away somewhat. But Goldman says this is down to the “deep distortion caused by the deep bear market, which has significantly affected the typical strong performance in the fourth quarter.”
For those still wishing to play the December rally then — here’s a potentially useful chart showing the historic sectoral performance of stocks in December:
So, come all ye (Goldman) faithful and invest in anything but oil and gas.
Related links:
Sell in May and go away? – FT Alphaville
www.StockSeasonality.com – Trade with the seasons
Short-term US interest rates turn negative – FT