What December Holds for Stocks

The macro view: The VIX (INDEX: ^VIX  ) gained nearly 5% today, which probably had something to do with stocks losing ground on this first trading day of December; the Dow Jones Industrial Average (INDEX: ^DJI  ) and the broader S&P 500 (INDEX: ^GSPC  ) both declined by 0.5%. Still, at 16.64, the VIX remains significantly below its historical average. That doesn't seem entirely consistent with the looming fiscal "slope" -- it's not really a cliff -- which the market appears to be tracking closely (judging by the coverage, you'd think it's the only factor driving stock prices).

The VIX is an indicator of market expectations for 30-day volatility in the S&P 500. Thirty days takes us into the New Year, i.e., over the "cliff," assuming negotiations do not come to fruition in time. Are investors overly complacent, or is the collective wisdom of the market signaling that politicians' failing to meet the Dec. 31 deadline is not the calamity that the media sometimes depicts? Difficult to say a priori, and the answer may not be obvious, even after the fact.

One thing a below-average VIX value is consistent with: the holiday season. Indeed, December is the least volatile if we look at the S&P 500's (INDEX: ^GSPC  ) monthly returns going back to 1950. It's also the month with the highest average return:

 

December S&P 500 Return

December Return, When S&P 500 Is Up Through November

December Return, When S&P 500 Is Down Through November

AVERAGE

1.7%

2.1%

0.8%

RANGE

(6%) – 11.2%

(4.2%) – 11.2%

(6%) – 7.3%

Sources: Author's calculations, Yahoo! Finance.

While those average returns figures may look encouraging, the range of returns is sobering -- particularly when one considers that, more than four years after Lehman, the environment remains anything but normal. Even as 2012 draws to end and the fiscal cliff threatens, there is still time to look at The One Energy Stock You Must Own Before 2014. Click here to receive The Motley Fool's free report.


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  • Report this Comment On December 04, 2012, at 7:15 PM, ChrisGraley wrote:

    Yeah that trick better happen in the next couple of weeks to help with the fiscal cliff.

  • Report this Comment On December 06, 2012, at 6:28 AM, thogshead wrote:

    Regarding "One thing a below-average VIX value is consistent with: the holiday season," if anyone is interested knowing how and when VIX volatility will change, Volatility Research accidently stumbled onto a pretty good way to predict VIX “fear guage” volatility using NYSE VXX:

    http://www.sites.google.com/site/VolatilityResearch/

    The klinker in this market-woodpile is VIX volatility, and this 11-month rally may prove to have been a house-of-cards.

    We’re in the lull before the Perfect Volatility Storm.

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