Analysts have plenty of explanations for the recent stock-price sag, many centering on the prospect the Federal Reserve will trim stimulus as soon as this week.
But there is one that few people have mentioned: Stocks usually do this in mid-December.
A chart of average stock performance over the past 100 years shows stocks endure a mid-December dip most years. Stocks tend to rise at the start of the month, pull back in the middle and bounce at the end. Then they keep rising at the start of January. Charts show this happening on average over the past 100 years, 50 years, 20 years and 10 years.
The late-December recovery is so common it has a Wall Street nickname: the Santa Claus rally.
There are exceptions, of course, mainly when the stock market is in big trouble. But in most years, stocks follow this pattern whether the Fed is on people's minds or not, whether earnings growth is strong or weak, whether Democrats or Republicans inhabit the White House.
"This is normal, absolutely normal. It is what stocks do this time of year," says Phil Roth, a veteran independent stock analyst.
Analysts offer reasons for this seasonal trend and it has nothing to do with sun spots. Year's end is a special period legally, administratively and psychologically, and that is what stock performance reflects.
December historically has been a time for what traders call tax-loss selling, and that often holds stocks back in mid-month. Investors who have recorded capital gains earlier look for losing investments and sell them, to create capital losses and offset the gains.
People also typically rethink their portfolios at year's end, revising them for the coming year. And professional money managers engage in a disreputable but widespread practice called window dressing. They get rid of losers or short-term investments they made to boost performance, items that might look bad if they appeared on year-end accounts. They buy items that make their holdings look good.
The net effect is that a lot gets sold in mid-December and later replaced with something different. Some are simply buying in ahead of the expected January bounce.
And except in really bad periods, January does often bounce. Although the trend has shifted a bit with time, a lot of retirement money still comes into the market at the beginning of the year. New allocations to investment funds may begin then. And people who sold in December may be putting cash back into stocks.
It is unusual for stocks to end December and start the year with declines. If they do, it can be a sign that something is wrong.
"If the market doesn't do well in the first two weeks of January it is usually a bearish indicator for the year," Mr. Roth says. Although the January trend has softened a bit over time, January performance is still strongly tied to the performance of the following 11 months.
In fact, the performance of most months has been fairly consistent over long periods, according to data from Bespoke Investment Group.
January on average has been a month of gains whether measured over 100 years, 50 years or 20 years. (It shows an average loss over the past 10 years, which has been a troubled period for the stock market, what with the 40% Dow Jones Industrial Average decline during the 2008 financial crisis.)
March, April, July, October, November and December also show average gains, whether measured over 100 years, 50 years or 20 years.
The one month that shows a loss over all those periods is September. Many people think October is the most dangerous month, since that is when stocks crashed in 1929 and 1987. But on average, October is one of the stronger months. September, a month when people often are wringing their hands over prospects for the rest of the year, is the month when stocks consistently seem to retreat.
The month with the biggest gains has varied over time. It has been December over the past 100 years, but over the past 20 years April, October and November all were stronger. Some people think professional investors have been more aggressively trying to anticipate coming gains, pulling January strength back to the fall.
"It has become a trade that people play more often and try to game," says Paul Hickey, co-founder of Bespoke Investment Group.
He also notes that bonus checks, once paid in December or early January, are coming later or in installments. Flows into retirement funds also are more spread out than they once were.
The month that has been most consistent is December, whose performance just plods along at 1.4% or 1.5%, whether measured over 100 years, 50 years or 20 years. December has shown a gain in 73 of the past 100 years, by far the most of any month. January is second at 64%, although it was up in just 12 of the last 20 years, a 60% average.
What does this mean for the average investor? Not much. The long-term averages don't tell anyone whether stocks will be up or down tomorrow or next month. They do suggest people might think twice about being out of the market around New Years.
They also tell people when to worry. If stocks aren't rising at the end of December, and if they aren't rising at the start of January, something is wrong.
"If the market doesn't follow the typical pattern it would be a signal that an underlying problem exists," Mr. Hickey says.
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