The Dow Jones Industrial Average and S&P 500 typically see their largest gains of the year in December, thanks to a surge coined the “Santa Claus rally.”

Since 1929, the S&P 500 has averaged a 1.5% return in December, with markets posting positive returns more than 70% of the time. The only other month with a 1.5% average return is July, with the remaining months’ average gains ranging from -1.1% to 1.2%.

December is also tied for the highest average monthly gains for the Dow Jones Industrial Average. From 1910-2010, December has averaged a 1.32% gain, tied with April. Other months’ averages range from -0.88% to 1.28%.

But the biggest market jump is normally seen on the last five trading days of the year and the first two of the New Year – which is how the rally became associated with Santa.

When isolating that single week, the S&P 500 has posted an average gain of 1.8% since 1929. Stocks have risen 79% of the time during that week in the past 83 years.

The December bump can be attributed to many factors. Some people invest their Christmas bonuses. Others invest with end-of-the-year tax considerations in mind. Maybe it’s just holiday cheer hitting Wall Street.

In 2012, however, the Santa Claus rally was lackluster. The Dow Jones Industrial average posted a gain of just 0.6% in December, while the S&P was up 0.7%. The Nasdaq inched up 0.3% that month.

Not exactly coal in investors’ stockings, but certainly not what investors wished for either.

This year, however, the Santa Claus rally may be the best the markets have seen in years.

In fact, Money Morning’s Global Investing & Income Strategist Robert Hsu recently pointed out three factors he believes will send stocks higher than normal this December.

“Money flow into global stock markets remains strong, fueling major averages higher into the holiday season,” Hsu wrote to his Permanent Wealth Investor subscribers last Friday. “Last month, TrimTabs Investment Research reported that more than $40 billion flowed into U.S. equity markets, much of it from cash sitting on the sidelines.”

“The [liquidity data] from TrimTabs shows money flowing in from cash sitting in the bank, not the bond market,” Hsu said. “Investors realize that at zero interest rate, cash must be put to work to outperform inflation.”
Liquidity is key, but Hsu believes strong gross domestic product (GDP) growth and recent unemployment figures will also play large roles in this December’s rally.

“The unemployment figure that came out this month showed monthly pace of net hiring to 202,000 over the last three months, around 7.3% unemployment rate,” Hsu said. “Q3 GDP growth of 2.8% is the fastest since Q1 of 2012, so that’s good.”

But those aren’t the biggest reasons to expect a strong Santa Claus rally is coming to town…

Yellen’s Impact on the Santa Claus Rally

Like Ben Bernanke before her, the next U.S. Federal Reserve Chair Janet Yellen is committed to monetary stimulus. She confirmed this sentiment in her testimony to the Senate Banking Committee last week.

“I consider it imperative that we do what we can to promote a very strong recovery,” Yellen said.

Stocks initially rallied at the time of the comments, and many expect stocks to continue upward as the Fed keeps spending.

“Given what we now know about [Yellen], I can even envision her increasing stimulus from $85 billion a month to $90 billion or even $100 billion a year or two from now if the economy has a major misfire,” Money Morning’s Chief Investment Strategist Keith Fitz-Gerald recently said in a piece regarding Yellen’s testimony. “Given the lack of recovery, it’s not beyond the realm of possibility anymore.”

The Fed-aided rally won’t last indefinitely, but for bullish short-term investors, December 2013 keeps looking merrier and merrier.

–Kyle AndersonSource: Money Morning

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