With the FTSE 100 rallying by just shy of 20% since the start of the year, thoughts are turning to how the final month of 2009 might pan out.
And the answer is, pretty well if you take history as a guide, according to Gerald Moser and the strategy team at Goldman Sachs. In its latest note, Goldman says if the first eleven months have been good, then December tends to follow suit. Over to Moser and the team:
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.
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.
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.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 December.
The only thing is, history may not always be a reliable guide, especially in such tumultuous financial times as we are now live in. Anyone who followed the adage "sell in May and go away, come back on St Ledger day" - that is, mid-September - would have missed out on a near 800 point rise in the FTSE 100. However October, traditionally a bad month, saw a 90 point decline (although in the scheme of things, that doesn't actually seem too awful a performance).
