Five Reasons December May Be a Strong Month for Stocks
In the last week of November, we saw one of the best weeks of the year for stocks, consistent with typical late-November seasonal strength. The big question now is, can it continue? December is off to a slow but positive start, with the S&P 500 up 0.4% last week (the first week of the month), but that’s not unusual for December and there are some good reasons to think we may be in store for additional gains. Here are six things to know about December that suggest we’re in a favorable seasonal environment for stocks.
First, December is the most likely month to have gains, with the S&P 500 higher more than 73% of the time.
Second, December is the third best month of the year since 1950, up 1.4% on average, but take note that over the past 10 years, December has been quite weak at slightly negative, with only September worse.
Third, December has only once been the worst month of the year, and that was in 2018, when we saw a near bear market when the Federal Reserve refused to cut rates and the market threw a fit. (The most common worst months of the year have been August and September.)
The good news is the Fed likely cuts this week, so we don’t expect a repeat of 2018, and the Fed is unlikely to raise rates anytime soon, taking that potential headwind out of play. In case you are wondering, the worst month this year was March, when the S&P 500 fell 5.8%.
The flipside to this is that December is also rarely the best month, with only four occurrences in the past 75 years. In the end, December rarely has big swings either way.
Fourth, a good first 10 months of the year tends to see solid gains the final two months. When the S&P 500 is up more than 10% for the year heading into November, those final two months have been higher an incredible 16 times in a row. With stocks pretty much flat in November, this could bode well for December if the seasonal pattern plays catch-up.
Finally, the S&P 500 is up seven months in a row, and although that is one of the longest streaks ever, we’ve seen 16 other streaks that made it this far, and continued gains are quite common.
Looking at those 16 long win streaks more closely, the next month gained 10 times, but even more impressive is that three and six months later, the S&P 500 was higher 14 times. There may be reasons to be bearish, but up seven months in a row isn’t one of them.
The bottom line is that after a 38% rally in 6½ months, some kind of pullback was probably needed to consolidate gains and potentially set the stage for the next advance higher. That is exactly what we saw in November, as stocks pulled back nearly 6% amid high levels of fear by some metrics. While every year is different, history suggests this may be a good setup for the often good (but not great) month of December. But that’s good enough—with that in place, we can let the great part of December just be good old holiday cheer.
Inflation Eases Enough, Giving the Fed Room to Cut
It’s been a while since we got any macroeconomic data thanks to the government shutdown. The most recent official payroll report for September was released a couple of weeks ago, and it showed that the unemployment rate continues to move higher, hitting 4.44% in September. While other data, like initial claims for unemployment benefits, points to a relatively low level of layoffs, a rising unemployment rate indicates that labor market risks are rising. Once the unemployment rate starts to move up, it takes on momentum that can be hard to reverse, even if the Federal Reserve reacts with a slew of rate cuts. That’s why in an ideal scenario, the Fed would be staving off a further rise in unemployment by easing policy sooner rather than later.
The problem right now is that inflation is running above the Fed’s 2% target. The Fed’s preferred inflation metric, core personal consumption expenditures inflation—that is, excluding food and energy—or “core PCE” has been sitting above 2.6% for 4½ years now (54 months). It’s come down from a peak of 5.6% (in early 2022), but over the past year it has stayed stubbornly high, in a range of 2.6-3.0%.
But there is a slight glimmer of hope in the data that the government just released, even if it was delayed data from September. Core PCE rose just 0.2% in September (equivalent to an annualized pace of 2.4%). Over the last three months of the period (July-September), core PCE ran at an annualized pace of 2.7%, a slowdown from the 2.9% pace in August and 3.0% in July. But over the past year, core PCE is still up 2.8%.
You kind of have to squint to see momentum slowing, but the Fed will take breathing room where they can get it. And this more or less locks in another 0.25 percentage point rate cut at their meeting this week, taking the policy rate to the 3.5-3.75% range. Fed funds futures currently price the probability of a rate cut at 87%, indicating investors also believe a rate cut is coming.
There’s a reason the probability of a rate cut at the Fed’s December meeting is not closer to 100%, and that gets to the angst several members have about cutting rates while inflation remains well above the Fed’s target.
Up until last year, inflation was elevated because of lags in official shelter inflation data, where official data was yet to capture the real-time dynamic of easing rents. However, that’s switched this year, and we’re starting to see shelter disinflation. Yet, inflation still remains elevated, and that gets to two other sources of inflation.
The first is durable goods inflation, which is up 0.9% year over year directly as a result of tariffs. Now, that reading doesn’t seem like a lot, but at the end of 2024, inflation for durable goods was running at minus-1.3%, so we’ve had a big swing to the positive side. Moreover, the current positive inflation reading for durable goods is outside the norm of what we’ve seen in recent history (outside of the supply-chain induced issues in 2021-22). From 1996-2020, inflation for durable goods averaged minus-1.9%—that is, at least in this category, prices were actually consistently falling. In fact, the highest reading over that period was minus-0.2% year over year in August 2011. So the current level of inflation we’re seeing for durable goods, while relatively low, is outside the “norm.”
The second reason is that we’re actually seeing elevated levels of services inflation as well. It’s currently running at 3.4% year over year, despite the slowdown in housing inflation. That would be OK if we were seeing goods prices fall at the same time, which would be more similar to the dynamic we saw in the mid-2000s, when services inflation was relatively elevated above 3%, but it was offset by goods deflation.
In fact, if you exclude housing, the PCE index for services ex housing is running at an elevated 3.6% annualized pace for the three months through September. That’s going in the wrong direction. The year-over-year pace is 3.3% and has remained stubbornly elevated for a few years now.
All this to say, there’s a reason why there’s angst amongst Fed members to cut rates. Still, we believe the majority of the committee will prioritize protecting the labor market (while focusing on the positives of inflation data, like shelter disinflation) and cut rates in December. Moreover, in 2026, President Trump is likely to pick a new Fed Chair who is more amenable to continuing to cut rates (Chair Jerome Powell’s term runs out in May 2026). That’s going to be positive for the economy, let alone the stock market.
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