Santa Claus Is Coming to Town

Smile. This is the best time of year for stocks.

Why year’s end is so good for stocks has long been a subject of debate. Some trace it to days when farmers withdrew money to finance a harvest in late summer, then deposited profits afterward. Others point out that many companies, not just retailers, do the bulk of their business and make their largest profits at year’s end, as clients buy for the new year. Markets tend to rise ahead of expected January investment of retirement money in stocks. And crude-oil prices have a way of falling at year’s end, after the summer driving season, easing inflation fears. That is happening now — with crude oil down to a five-month low of $56.14 a barrel last week — and also happened last year.

I think it’s mainly due to a surge of new money coming into the market. That probably explains the famous January Effect, when small-caps do much better than the rest of the market. My reasoning is that small-caps benefit the most from greater liquidity. In fact, small-caps do so well in January that they’re basically flat for the rest of the year.
The market also had a strong four-year cycle, where stocks peak the summer after a presidential election and bottom out just before the mid-term election. Bear in mind, this is an average of several decades worth of data. Most of these “calendar rules” are so fleeting that they don’t provide any practical trading guidance.
Here’s a much more useful stat: The market’s average return over five months is almost exactly equal to the average best day every five months. There are about 100 trading sessions in five months so that means that the market is flat for 99% of the time;100% of your profits come on just one day in 100.
Maybe you can pick the 1-in-100. I can’t, and that’s why I’m always fully invested.

Posted by on November 20th, 2005 at 2:31 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.