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Why December is (Usually) the Best Month to Start Investing

holiday effect

Ever wondered when the best time to invest in stocks is? Surprisingly, it may be December. December plays host to the Santa Clause rally. The holiday effect from the rally significantly boosts stock prices across the market each year.

What Is the Santa Clause Rally?

The Santa Clause rally occurs in December, typically the week before Christmas. Sometimes, the rally extends to the first days of the New Year. 

There are various explanations for the Santa Clause rally. Some experts believe the increase is due to the closure of institutional investors before the holiday season. Institutional investors tend to take a more pessimistic view of the market. When they leave for their annual vacation, the remaining retail investors drive up prices through their bullish investments.

Other finance experts believe the Santa Clause rally occurs due to a feeling of general optimism brought by the holiday spirit, potential tax considerations, and people investing their holiday bonus money.

Whatever the reason, investors won’t want to miss out on potential returns from the Santa Clause rally. If you invest in the early weeks of December, you’ll likely experience the holiday effect on the stock market that isn’t as typical throughout other months.

Best and Worst Months for the Stock Market

So, what are the best and worst months for the stock market? It depends. Stock prices can fluctuate wildly due to macro and microeconomics, and the month you invest doesn’t always predict which direction the price of your stocks will go.

However, historically investments made in certain months tend to outperform those made at other times. The January effect is well-known for significant gains in the market, so purchasing stocks in December can lead to increased returns.

April is another excellent month for purchasing stocks. During the summer months, stock prices tend to rise, so buying investments in April can result in gains through August. 

September is widely recognized as the worst month for investing. For reasons unknown, stock prices tend to take a sharp dip, which only increases in October and November. By December, the market evens out, making it a great time to pick up some bargain stocks and relish the returns.

When Does the NYSE Close During the Holidays?

There are a few NYSE holidays to be aware of in the coming months. 

On November 24, 2022, the NYSE observes Thanksgiving Day. However, it does not close for Black Friday so investors can trade on November 25.

Christmas falls on a Sunday in 2022, so the NYSE observes the holiday on the following Monday, December 26, 2022. The NYSE also closes to celebrate the New Year’s holiday on Monday, January 2, 2023.

To experience the Santa Clause rally, it’s best to invest in stocks after Thanksgiving but before Christmas. Stocks won’t yet have rallied, so you may find some bargains that increase in value over the last week of December and into January.

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