Expert Take heading with stock graph

As we head into December, market strength is adding to the holiday cheer of investors.

The S&P 500 is 24% higher year-to-date — its best year-to-date performance since 2013. Admittedly, that performance didn’t come easily as trade uncertainties, geopolitical issues, Federal Reserve policy, reduced corporate spending, and CEO confidence weighed on investors’ minds. In 2019, it took a large dose of patience and discipline to stay the course, and that will likely continue to be the case for the remainder of the year.

Will we see a market surge as we near the end of 2019? Possibly. In 2013, the S&P 500 advanced another 3.8% in the final month of the year. Historically, when the index reaches new all-time highs in November, as it did this year, it’s a positive sign that the market rally will continue.

Breaking it down

A trend known as the “Santa Claus Rally” is often discussed at this time of year. It’s believed the holiday spirit puts investors into a positive mood at the end of the year, and the market rallies in response to the holiday cheer. More accurately, the Stock Trader’s Almanac explains that Santa Claus pays Wall Street a visit, “… nearly every year, bringing a short, sweet, respectable rally within the last five days of the year and the first two in January.” Since 1950, this has been good for an average 1.3% gain, and it has yielded positive returns about 75% of the time since 1969. Believe it or not, after last year’s sharp sell-off in December, the S&P 500 recorded an increase of exactly 1.3% from Friday, December 21, 2018 through Thursday January 3, 2019.

While the Santa Claus Rally is a fun trend to discuss at parties, investors should be aware of a larger market trend related to seasonality. The good news is that stock market strength doesn’t usually end with the holidays and the start of a new year. Investors have historically continued to receive the gift of upside performance through the end of April. In fact, the Stock Trader’s Almanac has called the November through April period “the best six months” of the year. The push for performance at the start of a new year can be attributed to the inflow of cash into the market from several different sources, including bonuses, pension plan investments, and IRA contribution deadlines (individuals have until April 15 to max out the previous year’s contribution).

Positioning and timing

To get the most out of the seasonal strength of the market, it’s best to be strategic about sector allocation. Those sectors that are most highly correlated with the market (meaning they are more likely to move in the same direction as the market) usually have the strongest performance during this period. Cyclical sectors fit the bill for high correlation and as such, since 1990, the highest average price gains between November and April came from consumer discretionary, industrials, materials, and technology sectors, based on my analysis of market data from Capital IQ. Usually underperformance during this period comes from the sectors that are more defensive in nature, like the consumer staples, real estate, and utilities. Notably, performance for these sectors has still been positive during the period of market strength, but their upside has been the weakest among the 11 S&P 500 sectors.

Two of the top performing sectors in 2019 have been technology (+40%) and industrials (+25%), which naturally leads you to question whether to invest in these sectors at the end of the year. We are one month into the seasonally strong period, and November tends to be a key contributor to the seasonal strength, so I wanted to see how the cyclical sectors fared from December to April. Going back to 2000, in 77% of those years, two or more of the cyclical sectors outperformed the market at this point in the year. In the following five months, the performance of the four cyclical sectors combined outperformed the S&P 500 50% of the time (December through April), with at least two of those sectors outperforming in 79% of the years analyzed.*

Don’t miss out on market strength.

While the November rally (S&P 500 +3.4%) has been impressive, and some seasonal upside may be behind us, history suggests it isn’t too late to invest in the market as the end of the year approaches and market strength typically continues. Perhaps an investment in your future via the stock market will be the best gift you give yourself this year!

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*Analysis based on market data from Capital IQ.

Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.

Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.