Although this has been a rough year for stocks overall, there have been impressive gains in recent weeks. The Dow, for instance, was up close to 20% from its late September low as of the end of Thanksgiving weekend.
Traditionally, December is a good month for investors. Going back to 1950, during the period from Thanksgiving to the end of the year, the S&P 500 has risen 71% of the time. The average gain for the S&P 500 during that timeframe has been 1.8%.
While another 1.8% would certainly be nice for investors who’ve been battered by a tough year, it would come nowhere close to saving the stock market from its worst annual performance in quite a long time.
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Negative results are not uncommon for the stock market in any given year. Prior to this year, the last time the stock market ended a calendar year in the red was 2018, when the S&P 500 declined by 6.24%. The next annual loss before that, in 2015, cost the S&P 500 a modest 0.73%.
This year, however, is set to make 2018 and 2015 look like only minor hiccups for the stock market. As of the end of Thanksgiving weekend, the S&P 500 was down 15.53% for 2022.
Unless something really big happens in December, this will be the worst year for stock market returns since 2008. In the year of the 2008 financial crisis, the S&P 500 tumbled by 38.49%. Before 2008, you have to go all the way back to the late 1930s to find a worse year for the S&P 500 stock index.
It would not be unheard of for the S&P 500 to increase by a little more than 9% in a single month, thereby putting it ahead of 2018’s drop of 6.24% for the year. In just a single week this October, for example, the index logged a 3.9% gain. Still, getting, and keeping, a 9%-plus return throughout December isn’t very likely.
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Three big risk factors await investors in December: further inflation data, overseas geopolitical issues, and the Federal Reserve’s decision on its December rate hike. Inflation has been cooling somewhat in recent months, and despite Russia’s ongoing war in Ukraine, no particularly new calamities within the international supply chain have arisen. Yet, prices for goods and services have not been coming down quickly enough to satisfy the Fed, and another fairly aggressive rate hike is expected in December.
It’s not all bad news though. The traditional December rally is often followed by an early January rally — according to BofA Securities, the S&P 500 goes up 64% of the time over the first 10 days of January. Furthermore, all of this comes in the midst of a bigger seasonal trend: the six months from November to April usually favor a broad swath of cyclical stocks.
Zooming out even further, it is rare for there to be two or more years of negative stock market returns in a row. After stocks were crushed in 2008, the S&P 500 recovered by 23.45% in 2009. Loss years 2015 and 2018 were followed by annual S&P 500 gains of 9.54% and 28.88%, respectively.
This is looking to be the worst year for annual stock market returns in 14 years. But there is nonetheless hope to close out the year strong, and for the upward trend to continue into 2023. Of course, there is also a chance that we’ll all be flattened by a bitter recession in the coming months.
It’s obviously a risky time for the stock market. But when is it not? I think investors would be better served if we all do our best to get in the spirit for a holiday rally.
Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at [email protected].