Seasonality is the tendency for a particular market to exhibit similar price moves at certain times of the year. Seasonal patterns are based upon statistical analysis of historical data, and therefore are only ever backward looking. Whilst I am reminded of the old saying about "lies, damn lies, and statistics", in my experience it's better to know a big seasonal pattern is about to kick in, than not.
Which brings us to perhaps the best-known seasonal pattern in financial markets, the Santa Claus Rally! This is the tendency of stocks to show strong gains in December. As we'll see in the data, the Santa Claus Rally has been a very reliable seasonal pattern, and it can often continue through to January and February to make this period one of the best times to be invested.
When looking at seasonal data for the Australian stock market, I prefer to use the All Ordinaries (XAO)("All Ords") index instead of the benchmark S&P/ASX 200 (XJO). This is because the price history for the All Ords goes back considerably longer than the XJO, and it's also a far broader representation of the Aussie market because it contains 500 stocks compared to the XJO's 200.
The other key aspect of good seasonal analysis of stocks is adding back dividends. If you don't, you're not getting the full picture of their performance. All the data I'll show you in this article is based upon the total return of the All Ordinaries, so capital gains and dividends.
The data for November 2023 is in. The All-Ordinaries Total Return Index recorded a whopping 5.2% gain. This compares to the average November performance of the last thirty years of 0.8%, twenty years of 0.7%, ten years of 1.6%, and five years of 3.3%. So, November 2023 is consistent with long term performance in terms of it being an up month, and consistent with recent history of November being a very strong up month.
Let's say 2023 has resembled a typical year in terms of seasonality. Putting aside magnitudes of gains/losses and just dealing in terms of usually up or usually down, January, April, June, July, and November are all checks for usually up. May and September are checks for usually down. Finally, February and March are also consistent with more recent usually down trends.
So, if 2023 resembles a fairly typical seasonal pattern, what can we expect for December? Well, good news, long term trends suggest December is usually a good month.
December has delivered an average total return of 2.00% for Aussie investors over the last forty years, 1.95% over the last thirty years, 1.56% over the last twenty years, and 1.10% over the last ten years. Good, right?
No doubt, you've noticed a bit of a trend here. Average December total returns are getting smaller over more recent data samples. Yep, check out the average December total return over the last five years, negative 0.16%!
Another stat to consider here is the reliability of a December gain. This relates to the ratio of December winners to losers, and it removes some of the skew which might occur due to outliers in the December performance data. The data shows reliability trends reflect performance trends, December has been quite unreliable of late!
December reliability over the last five years has been just 40%. That is, just two out of the last three Decembers delivered a positive total return. This compares poorly with longer periods' reliabilities of 70% or greater. Indeed, over the last thirty years, December has been the equal-most reliable month of the year for delivering a positive total return, with 73.3% reliability (equal with April and July).
There weren't any major December performance outliers in the last five years to disproportionately influence the 10- and 20-year performance samples. With this in mind, I propose there does appear to be a very modest trend towards smaller total returns for Australian stocks in December.
December positive total return reliability is consistent in all but the five-year sample, so it is possible the last five years are simply an outlier – and it is a small period to sample. But the December data does lead me to a working theory on the concept of the Santa Claus Rally.
I believe investors are potentially anticipating the much-vaunted Santa Claus Rally, and therefore are getting in early! This means they're increasingly pushing the gains which would usually have occurred in December into November. This perhaps leaves December open to a modicum of underperformance – if only against its very positive historical trends.
As I said, it's a working theory for now, the trends are still quite recent. But this highlights a potential problem with seasonal analysis – sometimes, just when you figure one out, the market has already factored it in and changed the landscape again!
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