Santa Claus Rallies

With today being the first trading day of December, it is worth keeping in mind that historically December has been one of the best months for stocks.

One reason December is a good month for stocks is that many money managers (mutual funds, hedge funds) get paid, including bonuses, based on their performance.  As the end of the year approaches, with these bonuses and incentives in sight, they have a strong incentive to boost performance in any way possible. 

One way they do this is by trying to push up the price of stocks by buying them – either ones they already own or the year’s best performers or one’s they believe other managers will be buying.  This buying can create an end of year surge known as a Santa Clause Rally. 

As you can see from this chart, most of December’s big gains come in the last 7 trading days – when there is generally very little news but very much interest in one’s year end performance.

Look for the same thing this year.  After this Friday’s November Jobs Report and the Fed Decision next Tuesday, the only significant events I am aware of are investment bank earnings: Lehman (Thu 12/13), Goldman (Tue 12/18) and Bear Stearns (T.B.D.).

After that, not much of any fundamental importance will come out, but human psychology is likely to be on display.