Why December has been good for stock markets

For Indian stock market, December seems to be the month of anticipation and excitement for investors. Year after year, the Nifty index has exhibited a consistent pattern of delivering positive returns during this time.

According to data from Bajaj Broking’s research team Nifty has given positive returns in 17 of the past 24 years.

“Over the past 24 years (since 2000), the Nifty index has shown a consistent pattern of delivering positive returns in December. Specifically, Nifty has closed higher in December 71 per cent of the time (17 out of 24 years).” This observation has led to a widespread belief that December is one of the best months for the Indian stock market.

Sonam Srivastava, Founder and Fund Manager at Wright Research, explained, “December often sees positive returns for the Nifty due to a combination of year-end factors. These include portfolio rebalancing by institutional investors aiming to align with annual performance goals and the festive season’s impact on consumer demand, which boosts market sentiment.”

Gaurav Garg, Research Analyst at Lemonn Markets Desk, added, “FII data shows that FII have been net buyers in December majority of times. December coincides with festive and holiday spending in India and globally. Positive consumer sentiment during this period can lead to better-than-expected corporate performance projections. FMCG, Consumer Durables sees December benefits from sustained rural and urban demand driven by festivals and weddings. Energy companies see higher demand during the winter months which can positively influence the sentiment for energy stocks.”

The outperformance in December has not been limited to a specific sector. “Certain sectors have consistently outperformed in December, notably consumer goods, banking, and IT. The festive season increases demand for consumer products, driving stock performance in this sector. Banking and financial services benefit from increased year-end lending and spending activities, while IT companies gain from global contract renewals and budget finalisations by international clients,” Srivastava noted.

However, Nifty’s December performance hasn’t always been rosy. According to Srivastava, “In the years when December showed negative returns, external shocks and domestic challenges were predominant. Global economic slowdowns, such as the 2008 financial crisis, created ripple effects, impacting investor confidence. Domestically, policy uncertainties or significant regulatory changes have added to market volatility.”

Negative returns occurred in 2011 (-4.3 per cent), 2014 (-3.6 per cent), 2022 (-3.5 per cent), 2002 (-0.8 per cent), 2000 (-0.4 per cent), 2018 (-0.1 per cent), and 2016 (-0.5 per cent).

Bajaj Broking’s research team also mentioned, “Volatility (market fluctuations) might be higher this December due to key global and domestic events: RBI’s Monetary Policy Announcement, US Federal Reserve (FOMC) Interest Rate Decision.”

Despite the occasional setbacks, the overall trend remains overwhelmingly positive. The analysts are optimistic about the outlook for December 2024, stating, “The outlook for December 2024 appears optimistic due to strong economic indicators and corporate earnings recovery post-pandemic. A stable monetary policy by the Reserve Bank of India is ensuring liquidity in the market, while domestic retail participation remains robust.”

Srivastava echoed this sentiment, noting that “the factors driving optimism this year are aligned with previous years of positive December performance, including festive-driven demand and favorable global market conditions, making it a promising period for equity markets.”

As investors eagerly await the outcome this December, they will be keeping a close eye on global and domestic economic indicators, as well as any potential policy changes or geopolitical developments that could sway the market’s performance.