Remember the horror of 2008 when the Great Recession hit and the markets plunged? Even then the S&P 500 managed to climb nearly 3% during the last five trading days of the year.
When trading volumes were much lower a similar pattern emerged. For example, on December 26, 1996 trading volumes hit record lows of barely 200 million shares on the NYSE but still the Dow managed to climb 27 points that day.
Flash forward to December 2020 – Tesla’s addition to the S&P 500 right before the holidays. Index funds had to buy roughly $80 billion worth of shares when trading volumes were hitting annual lows. The stock jumped 70% in the weeks leading up to inclusion. Perfect example of how year-end liquidity dynamics can amplify market moves.
So what’s likely to happen over the next few days?
Volume May Fall But Markets Often Rise
BlackRock’s numbers tell the story because their equity trading desks typically see volume drop 15-25% during the last week of December. Market makers can feel it on the floor trying moving a block of Nvidia and might discover spreads twice as wide as normal. When market makers head to Aspen, liquidity doesn’t just dip, it virtually vanishes.
JPMorgan’s trading desk published something interesting recently. They’ve tracked $15 billion in pension fund rebalancing flows hitting markets this December, which makes sense given the tech rally we’ve seen. When the Magnificent Seven stocks are up over 70% YTD, somebody’s got to sell and rebalance.
Just look at what happened last December when Apple dropped 12% that month as tax-loss selling accelerated into thin markets. Classic year-end pattern, but this time with actual fundamental concerns about iPhone demand adding fuel to the fire. Those moves get exaggerated when half your normal trading counterparties are gone.
The Retail Shift Is Fascinating
Walmart reported their November digital sales grew 24% year-over-year. Target’s online traffic hit records. Yet when I stopped by their physical stores last week, the parking lots were still packed. The Census Bureau’s data backs this up – holiday spending running about 3% above last year’s pace, split pretty evenly between online and brick-and-mortar.
Some things haven’t changed though. In December 2023, Microsoft announced their Copilot AI expansion when trading was paper-thin and the stock jumped 4% in two sessions. That reminded me of December 2020 when Apple announced their EV plans during the holiday lull. A classic example of companies timing news flow for maximum impact.
Look at what happened at Morgan Stanley last December when their prime brokerage reported hedge funds reducing gross exposure by nearly 15% heading into year-end. Pure window dressing. Everyone wants their books looking clean for January client reviews. Same story this year, according to their latest report.
Big Firms Focus on Liquidity
The evidence is there if you dig through SEC filings – major institutions explicitly factor seasonal liquidity into their trading strategies. Vanguard’s annual reports mention adjusting their implementation shortfall models for December volumes. State Street literally schedules certain index rebalances around these patterns.
What really matters? Finding actual good businesses. The boring stuff. Like Tyson Foods that is growing earnings by almost 30% annually over the next five years and has around 20% upside to fair value.
After pulling some numbers from my database this morning to check my memory, it’s clear that patient investors still win. Missing the 10 best trading days per decade absolutely wrecks returns and should make you giggle when people think they can time this perfectly. Markets just don’t work that way and never have. Those that missed the past two years alone lost out on around 60% returns alone.
After 20+ years watching this stuff, I’ve learned to trust what works, not what makes a good story. December patterns? The happen to be quite real and definitely interfere with market dynamics but they’re by no means magical. Real capital rebalancing tends and big money trying to get ahead of January rebalancing flows drive demand in the final days of the year, more often than not.
Does The Market Rally In The Last Week of the Year?
Yes, historically the stock market tends to rally in the last week of the year. This phenomenon, known as the “Santa Claus rally,” occurs about 81% of the time with an average gain of 1.3%.
For those looking for a dependable pattern that repeats time and again, it doesn’t get much better than an 81% success rate. But buyer beware, that means 1 in 5 years the market fails to rise as anticipated so, as always, nothing in the markets is a slam dunk.
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