Investing End of Year Stock Market: What to Expect

As the year draws to a close, investors often find themselves wondering what to expect from the stock market in the final weeks of December. Historically, the stock market has been known to experience a surge in volatility during this time.

In the past, the stock market has tended to experience a slight decline in December, with an average decline of 1.3% over the past 20 years. This is likely due to the combination of year-end tax selling and investors taking profits.

The last trading day of the year, December 31st, has historically been a particularly volatile day, with an average decline of 0.7% over the past 20 years.

As the year comes to a close, it's essential to take a closer look at your investment portfolio and make any necessary adjustments. You may find that your mix of assets has shifted due to the ups and downs of the market, similar to the 60/40 approach to investing, which can easily become 70/30 or even 80/20.

To stay truly diversified, it's a good idea to rebalance your portfolio by selling some of your outperforming stocks and moving that cash into bonds. This will help you get back to your original mix and avoid putting too many eggs in one basket.

The S&P 500 has historically shown significant year-to-year gains, with a 10% annual gain over the long-term. However, it's not uncommon for the market to bounce up and down, as seen in the 2021 to 2023 period, where the market fluctuated significantly.

Here's a brief look at the S&P 500 annual returns over the past decade:

By reviewing your portfolio and making any necessary adjustments, you can ensure that you're on track to meet your long-term investment goals.

The S&P 500 has averaged a jump of around 0.9% in October, 1.4% in November and 1.6% in December since the mid-1940s.

These numbers are based on data from CFRA Research, which also found that the S&P 500 rose in 60% of the Octobers, 66% of the Novembers, and a whopping 77% of the Decembers since 1945.

It's worth noting that the S&P 500 lost an average of 0.6% in September, making October a relatively strong month for stocks.

Rebalancing your portfolio is a crucial step in maintaining a stable investment strategy.

Nothing in life stays the same, including your investment portfolio. That means you need to take some time at least once per year to "rebalance" your investments to ensure the mix of assets is in line with your intentions and goals.

The 60/40 approach to investing is a popular strategy that holds 60% stocks and 40% bonds. If your stocks have outperformed bonds, your mix may be more like 70/30 or even 80/20.

Stocks can rise quickly, but they can also fall quickly. To stay truly diversified, it may make sense to rebalance by selling some of your outperforming stocks and moving that cash into bonds.

Rebalancing your portfolio is not about following short-term trends, but about staying true to your long-term strategy.

The long-term stock average is a crucial concept to grasp when it comes to investing. Since the S&P 500 was introduced in 1957, its annual return, including dividends, has averaged over 10% through the end of 2024.

This means that if you had invested $100 in 1928, you'd have nearly $800,000 as of the end of 2023, according to data compiled by NYU Stern professor Aswath Damodaran.

The S&P 500's annual return averages 10.06% when going back to 1928, using data from other large-cap indexes to account for the period predating the S&P 500.

Here's a breakdown of the S&P 500's annual returns over the past decade:

The S&P 500 has outpaced the historical average a bit, returning an annual average of 13.3% with dividends over the past decade.

The U.S. tax code is incredibly complicated, and it would take a separate article or two to fully explain it.

Capital gains taxes on investments held for less than 12 months typically correspond to your normal income tax rate – which can be as high as 37%.

You can deduct up to $3,000 in net losses from your total annual income if your losses exceed your gains.

Selling a losing stock position is an important year-end tool for investors when it comes to reducing tax burdens.

If you make $8,000 on a short-term investment but lock in $4,000 in losses in another asset you were planning on selling anyway, you only pay taxes on the $4,000 that's not offset.

As we approach the end of the year, it's essential to analyze the current market trends to make informed investment decisions. Historically, the stock market has experienced significant fluctuations during this time.

The average annual return on the S&P 500 from November to December is around 2.5%. This is a relatively stable period, making it a good time to invest in the market.

Stock markets can be unpredictable, with annual returns varying significantly from year to year. Some years have double-digit positive returns, while others have double-digit negatives.

The Great Depression is a prime example of this unpredictability, with the market experiencing a 43.81% gain in 1928, followed by four consecutive years of negative returns, ranging from -8.30% to -43.84%. This rollercoaster ride of returns is not unique to the Great Depression, as we've seen similar fluctuations in more recent times, such as the Great Recession and even as recently as 2021 to 2023.

The S&P 500's annual returns have been around 10% per year when looking at the long-term gains. This is a key takeaway for investors, as it highlights the importance of staying invested long-term to navigate difficult periods.

Investing in the stock market carries risks, and you may be subject to losses or even lose all your money. This is why diversifying your investments is crucial, such as putting money into an index fund that reflects a broad range of stocks.

The S&P 500 continuously rebalances to reflect companies that are growing or shrinking, so the 500 companies in there now might not be the same as what will be there in five, 10, or 50 years.

Investor sentiment can be a powerful force in the markets, often driven by emotions and psychology rather than cold hard facts.

Markets aren't always rational, and investor sentiment can move markets up or down, even if the financials don't necessarily support it.

Investors might start worrying about a possible recession, even if there's not much indicating that's likely, and begin selling stocks.

As that selling drives down prices, it can cause more investors to panic and sell, driving down the market further.

The stock market is influenced by a variety of factors, and understanding these can help you make informed investment decisions.

Low interest rates can boost stock prices by increasing demand for stocks over other assets, such as bonds. This is because bonds aren't paying much interest in a low-interest-rate environment, making stocks a more attractive option.

High interest rates, on the other hand, can hurt stock prices by making borrowing more expensive for companies, which can negatively impact their bottom lines.

Investing in the stock market over the long run can be a reliable way to grow your wealth, with the S&P 500 averaging over 10% annual return, including dividends, since its introduction in 1957.

The historical average return of the stock market is a crucial factor to consider when investing.

Over the past 10 years, the S&P 500 has outpaced the historical average, returning an annual average of 13.3% with dividends, which is similar to the 12.55% return of the Russell 3000 index.

The Russell 2000 index, representing smaller companies, has seen a 7.82% annual gain over the same period.

Long-term returns are historically positive, with the S&P 500 averaging over 10% annually since its introduction in 1957.

Going back to 1928, the annual return averages 10.06%, which would have turned a $100 investment into nearly $800,000 by the end of 2023.

The stock market's long-term growth is a testament to its potential for steady returns over time.

Here's a comparison of the historical average returns of the S&P 500 and other indexes:

These numbers demonstrate the potential for long-term growth in the stock market, making it an attractive option for investors with a time horizon of several years or more.

The stock market is a complex beast, and there are several factors that influence its returns. Some of these factors include company valuations, which reflect a company's future value that investors are willing to pay today.

The stock market has a tendency to trend upward over the long run, but it's not a guarantee. The S&P 500 has averaged a jump of around 0.9% in October, 1.4% in November, and 1.6% in December since the mid-1940s.

However, it's essential to note that these seasonal trends are not a guarantee and can be influenced by various economic factors. The Fed has signaled plans to continue hiking rates to lower inflation, which can hurt the price of financial assets like stocks.

Yearly returns can vary significantly, with some years having double-digit positive returns and others having double-digit negatives. For instance, the equivalent of the S&P 500 gained 43.81% in 1928, but then experienced four consecutive years of negative returns during the Great Depression.

Despite these fluctuations, the S&P 500 has averaged around 10% per year in the long term.

Low interest rates can boost stock prices by increasing demand for stocks over other assets like bonds. This is because bonds aren't paying much interest, making stocks a more attractive investment option.

Low interest rates can also help companies' bottom lines by making it less expensive to borrow money for investing in business expansion activities.

Corporate earnings are a crucial factor affecting returns, and publicly traded companies in the US must report them every quarter. This data reveals total revenue and profit, giving investors a clear picture of a company's financial health.

These reports also include future guidance, which can influence investor decisions. This guidance can impact the stock price and its accuracy in reflecting the company's value.

Investors can use corporate earnings data to determine whether the stock price accurately reflects the company's value.

Investing in the stock market can be unpredictable, with yearly returns showing a lot of variability. Even if the economy is doing well, unexpected events like foreign wars can cause the market to plummet.

Many factors influence stock prices, and even the largest companies can lose their status over time. The S&P 500 index continuously rebalances to reflect companies that are growing or shrinking.

Investing carries risks, and you may be subject to losses or even lose all your money. The best way to build wealth is to keep investments for the long term, a strategy called buy-and-hold investing.

Keeping investments long-term helps even out swings in value, and annual returns are calculated in a way that may not represent actual investing habits. Investors often buy and sell at different times of the year, not just on the first trading day.

Index funds charge fees that cut into returns, and the higher the fees, the more you'll lag the index. Still, buy-and-hold investors tend to experience significant gains over the long term.

The January Effect is a stock market phenomenon where the first month of the year tends to be positive, but it's not as compelling as you might think. Historically, January ranks eighth out of the 12 months over the last 20 years.

Investment banker Sidney Wachtel first noticed the January Effect in 1942, but our own look back at the SPDR S&P 500 ETF since 1993 shows that it's not a particularly strong indicator. Out of 31 years, there have been 18 winning January months and 13 losing ones, making the odds of a gain slightly higher than a coin flip.

The efficient market hypothesis argues that share prices reflect all available information, making it difficult to outperform the market through stock selection or timing. This theory is an argument against seasonal phenomena like the January Effect.

Some investors believe that January is a good time to begin an investment program or follow through on a New Year's resolution. Others think that mutual fund managers engage in "window dressing" by buying top performers and getting rid of losing assets for year-end reports.

Research on the January Effect has shown that it's not just about tax-loss harvesting and post-New Year repurchases. Studies have also linked it to investor psychology, including overreaction and seasonal portfolio adjustments.