December is the strongest month for the stock market – the lesson from history for investors is don’t be out of the market in this month. Since 1984 (when the FTSE 100 Index was created), the index has increased on average by 2.5% in December. In fact, in the 28 years since 1984 the market has only fallen four times in December – the last time in 2002.

The accompanying chart plots the percentage performance of the FTSE All Share Index for each December since 1982. For example, last year in 2012 the market rose 0.9% in December.

It is interesting to note that the extraordinary strength of shares in this month (sometimes called the December Effect) is not limited to the UK. An academic paper published in 2013 showed the results of analysis on stock markets in 70 countries; it was found that across these 70 stock markets December was the strongest month (with an average return of 3.1%), and out of the 70 countries 65 have positive returns in December.

On average in December the market rises very gently in the first two weeks, and then roars away in the second half of the month – which is the strongest two-week period in the whole year for the market. Further, historically the two strongest days in the whole year for the market have been 24 and 27 December.

Sectors

In the last twenty years the sectors that have been strong in December have been: Construction & Materials, Life Insurance, Support Services and Travel & Leisure; while the weak sectors have been: Banks, General Retailers, and Pharmaceuticals & Biotechnology.

Shares

For companies, the following FTSE 350 shares have performed well in December over the last ten years: William Hill, Balfour Beatty, JPMorgan Emerging Markets Inv Trust, Witan Investment Trust and Alliance Trust; the shares of these companies have risen every December for the past ten years. The shares that don’t seem to like December are: Centamin, Rank Group and Amlin.

December is a very quiet month for company results: only three FTSE 100 companies release their prelims (finals) and there are no interims.

Diary

Dates to watch this month are: 4 Dec – MPC interest rate announcement at 12 noon (anticipated), 5 Dec – US Nonfarm payroll report (anticipated), 10 Dec – FTSE 100 Index quarterly review, 19 Dec – Triple Witching. The London Stock Exchange will be closed 25th and 26th and will close early at 12h30 on the 31st.

Article first appeared in Money Observer

Further articles on December.