S&P 500 Melt-Up? The Data-Driven Case for SPX Upside in December

S&P 500 Key Points

• December has historically been one of the strongest months for the S&P 500, both from an average return and win rate basis.
• December returns following a +20% gain in the first 11 months have been even more impressive over the last 40 years.
• Fears about elevated valuations, the potential for higher interest rates, an AI bubble, a potential trade war, etc. are still worth considering.

December is in the air, and with it, all of the standard seasonal fare for this time of year: The in-laws are finally back home after overstaying their Thanksgiving welcome yet again, the stress from a year of Christmas shopping procrastination is growing more and more acute, and market strategists are abuzz talking about the potential for a “Santa Claus Rally” in the stock market.

First formalized by Yale Hirsch in the 1972 edition of The Stock Trader’s Almanac, the Santa Claus Rally describes the historical tendency of the stock market (particularly the S&P 500) to climb during the last five trading days of the year and the first two of the new year.

While the Santa Claus Rally technically only covers the last five trading days of the year, many traders and analysts use the term to refer the stock market’s general tendency to rally in December. As the chart below shows, December has been the 2^nd best month for S&P 500 (price-only) returns since 1950, though of course past performance is not necessarily indicative of future returns:

Source: TradingView, StoneX. Past performance is not indicative of future returns.

Interestingly, when we look at the probability of any given month closing higher, December has actually been the strongest month of all, with the S&P 500 closing higher in December nearly 75% of the time since 1950:

Source: TradingView, StoneX. Past performance is not indicative of future returns.

Now of course, these are just long-term averages that lose a lot of the nuance in any given year, but the stock market has seen particularly strong returns through the first 11 months of the year, potentially increasing the likelihood that asset managers will have to “chase” performance into year end. Looking just at years when the S&P 500 was trading up by 20%+ through the first 11 months (it finished November up ~26.7% this year), the index has finished December higher seven of the last eight occurrences over the last 40 years, though the track record before then was more mixed:

Source: TradingView, StoneX. Past performance is not indicative of future returns.

Make no mistake: Fears about elevated valuations, the potential for higher interest rates, an AI bubble, a potential trade war, etc. are all worth considering, but it’s also true that the strongest bull markets climb the proverbial “wall of worry.” While pessimism and skepticism are always fashionable when it comes to the outlook for the stock market and the economy, the longer-term track record suggests that traders may want to avoid getting too bearish until we flip the calendars to 2025 at the earliest.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX