Is December the best month for trading stocks?

Do stocks perform better in specific months of the year? Check out this article to find out if December is a good month to trade! 2022 has been a year full of ups and downs for the financial markets. In extremely volatile conditions, some of the most popular assets have experienced record-breaking lows and others have skyrocketed to new heights. Even though every year comes with its surprises as any economic event could impact the market, in general, there are some months in which the stock market tends to perform better.

Keep reading to see if trading in December is a good idea for your trading strategy.

Market Seasonality

Market seasonality involves studying a market over time to determine if it has regular and predictable changes in price each year. The seasonal pattern of every market is driven by periods of increased supply or demand throughout the year. We can use seasonality to identify these periods in advance to get a sense of how a market will perform in the near future.   

Throughout the years, it has been observed that December is one of the most successful months for the stock market the tendency for stocks to climb in December is known as the “Santa rally”. Why does this happen? One possible explanation could be due to the general feeling of optimism surrounding the seasonal joy in December, making traders and investors feel more confident in buying rather than selling their CFDs.

Historical Observations

The S&P 500 Index

There is no doubt that the S&P 500 is the most popularly studied index for seasonality effects. It is often referred to as a reflection of the American stock market since it consists of 500 of the most capitalized US stocks. It has been found in several studies, which examine the index's monthly returns, that the index typically makes strong returns during the month of April and around the turn of the year, with particularly notable gains in December and January.

The Dow Jones Industrial Average

Likewise, the Dow Jones Industrial Average has been studied for seasonal effects as it is an index of the 30 biggest stocks in the U.S. stock market. The data resulting from an analysis of over 30 years of performances for major stocks, has led to the conclusion that as with the S&P Index, the Dow Jones tends to perform better during December and April, and performs worst around September.

It’s essential to keep in mind that not every year is the same as the markets are constantly altered by economic and political events of a specific period in time, and market sentiment that drives the momentum.