Goldman is increasingly confident in the end of year rally.  In fact, a recent piece of research says December could be one of the strongest months of 2009 (not an easy feat considering the year we’ve had).  Like other bullish investors, they believe seasonality will be an important influence on year-end action:

As we move into the year end, we take a look at the seasonality effect in equity markets. December stands out as one of the best months for equities, using both long- and short-term data; we think this year will be similar. In years when the first 11 months have yielded good returns, December has tended to be particularly strong.

December yields good returns on average
Based on monthly data going back to 1974, December has on average returned twice as much as the monthly average (1.7% vs. 0.8%). It is the third best month based on average data and the second best one using median data. It is interesting to note that January is also a good month for equities based on long-term data. December and January both yielded a positive return in more than 70% of the cases.

Goldman goes on to note that December is particularly strong when the current year has been strong:

The better the year, the better the December
There have been worries among market participants that the year end could see weakness in equities, following the strong year-to-date performance. However, historical data tell the opposite. In years when the return from January to November has been strong, December has tended to be very strong as well.

How to play it?  Don’t rely on commodities to continue their inverse dollar surge.  In fact, the best performing assets in big years have been financials cyclicals:

Oil & Gas has underperformed historically in December
Commodity related sectors exhibit the lowest relative returns among all sectors in December. This holds even when restricting the sample to years when the market went up by more than 20% in the run-up to December. Conversely, Financials and selected Cyclicals have been the best performing sectors in December when the market has risen by more than 20% in the first 11 months. Looking at countries, the results are less interesting as the differentiation is less marked than between sectors. Germany stands out as the best performing country on average in

Conditional seasonality: The better the year, the stronger the December
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 (Exhibit 5).



Where to play it?  Italy and Germany have been the best performers:



Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • xxxxxxxL

    There is a long time that robbing the truth is a lucrative business,moreover with states backing for theses purposes.

    BNP Paribas capital increase share price (SG 30% Loyds 40 % discount on actual price)

    Banks debt roll over 7.Trillion by 20012 (interest simulation,coupled with Basle 2 is strongly recommended)

  • Kurt

    Smells like Bull Sh*t to me. Did Goldman put out a memo back in March giving everyone a head’s up that they were about to us the TARP money to buy stocks and to expect a 50% rally? No. This is “dis-information” at it’s best.

  • AWF

    Here is how its going to play out:

    Typical 5% correction starts the beginning of December–might last 5-10 days to play out.

    Typical year end rally thru December 31.

    January–Hang-Over should occur.

    The question is –How big is this Hang Over going to be??

  • Rob

    Seems to me the dollar needs to strengthen for there to be a pullback in the equity markets.

    Last week John Taylor of FX Concepts predicted that even thought the Euro is “fully priced” that it had some additional upside against the dollar in the short-term. He said that he expected a move to $1.525 this week. He implied that the move down in the dollar would coincide with a top in the S&P500 at about 1,120. He said that “the dollar might be near the end of best to borrow.”

    The most surprising comments are that he is most bullish on the currencies of Norway and the US over the next 12 months. And that he expectes the Mexican peso to collapse sometime over the next couple of years probably falling to 25 from 13 today.

    I have no idea what might start a short-squeeze on the dollar if one ever occurs but the short-squeeze on the Japanese yen last year was pretty spectacular.

  • heywally

    As long as the price of the S&P 500 closes no lower than about 3% below the 50 day MA on the daily chart, I will buy the dips. But I have no predictions. :) I’ve also noticed that the GS stock has slumped.

  • Ken

    Of Course there will be a year-end rally – after all that’s how Goldman will justify yet another round of Bonuses. The insider executives at most corporations are selling at a 30-1 ratio to buyers. What does that tell you?