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Why investors are often bullish in December
Whatever the reason, one consequence is that a bear market is unlikely to begin in the last few weeks of the year Â
By Mark Hulbert for The Wall Street JournalÂ
Chalk it up to the holiday spirit: In December, both professional stock-market timers and individual investors are more bullish than in any other month.
This means a bear market is less likely to begin during the last few weeks of the year than at other times. But don’t expect a big market surge, either. The bullishness in December is more nuanced than the exuberance sometimes seen the rest of the year—which means investors probably won’t go on a buying spree.
This December confidence has been showing up for a long time. Consider a survey that has been conducted weekly by the American Association of Individual Investors of its members. In Decembers of the past 20 years, 43.9% have reported themselves to be bullish, higher than any other month. The other 11 months’ average is 38.0%.
Investment advisers are also in high spirits at this time of year. One piece of evidence is the average recommended equity-exposure level among a group of nearly 100 stock-market timers, a statistic that is updated daily by my investment-performance auditing firm, Hulbert Ratings. Over the past 20 years, this average in December was 45.8%, the highest of any month. December’s average is more than 10 percentage points higher than the 34.2% average for the other 11 months.
For data before 2000, we can turn to Investors Intelligence, a market-research firm, which has weekly survey data for investment advisers dating back to 1963. Again, the data reveal advisers were more bullish in December, on average, than for any other month.
No credit to Santa
So what’s behind all that December bullishness?
You might think it’s a reflection of a common belief that the stock market rises in December—a phenomenon that is sometimes referred to as the Santa Claus rally. But that seems doubtful. For one thing, the conventional wisdom isn’t true: The stock market historically hasn’t been an above-average performer until the last few days of December and into January.
In addition, the consistent pattern in all other months is for bullishness to rise only after the market has been strong. Just the reverse of that pattern happens in December: Investors and market timers typically become more bullish in early and mid-December, before the market rise late in the month.
Still, while there is no consensus about what causes the bullishness, the holiday season does appear to play a role. That suggestion emerges from research conducted by two finance professors: Ben Jacobsen of the TIAS Business School at the University of Tilburg in the Netherlands and Cherry Yi Zhang of the Nottingham University Business School in Ningbo, China.
When studying 300 years of monthly patterns in the stock market, the professors found that when Christmas became a public holiday in the mid-19th century, the stock market began performing better than before in January. December, in contrast, which previously had been an above-average performer, subsequently performed no better than average. They speculated that Christmas may have begun to affect investors’ moods, such as by encouraging a “time of reflection.”
Buying on discount
This suggests that the bullishness that regularly appears in December is different than what may appear at other times of the year. It isn’t a bullishness that responds to market strength by jumping on the bullish bandwagon, but instead a less-reactive optimism. One possible consequence may be that investors and market timers in December will be less likely to dump their stockholdings when the market is weak.
Support for this interpretation comes from the relative infrequency of bear markets that begin in December. The last one that did so, in the calendar of bull and bear markets maintained by Ned Davis Research, was in 1968.
The stock market’s rally on Dec. 2 may be evidence of this holiday spirit. Before that rally, major market averages, such as the Dow Jones Industrial Average, had fallen as much as 7% below the all-time highs they set recently, and the Russell 2000 index—a small-cap and midcap stock benchmark—had fallen 13% below its recent high. But on the second trading day of December the stock market staged one of its biggest rallies in months, with the Dow tacking on 618 points and the Russell 2000 gaining 2.7%.
* Mark Hulbert is a columnist whose Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited.Â
