By: Brenden Gebben, MBA, CIMA®, Managing Director & Thomas Kapfer, MPA, Associate

Looking back at the previous eleven months of 2015, markets have endured more than a few trying periods, including a summer stock pullback, continued global monetary stimulus, tumbling oil prices, and another round of financial turbulence in Greece. However, in spite of an eventful year and a challenging first couple of weeks in December, statistically December has been a good month of the year to be in the stock market.

According to Ned Davis Research, since 1928, the month of December has produced a positive return 74% of the time (64 positive months of 87 measured), by far the most positive return frequency for any single month. While these 64 positive months produced an average return of +3.0%, the 23 months of December with a negative return produced an average loss of -2.9% – the smallest average loss of any single month. Combining these figures, it is not surprising to see that December has produced an average return of +1.4% since 1928, the second highest average return of any month.

Many theories have been suggested to explain the positive market performance seen in the month of December, including the appropriately named “Santa Clause Rally”, which describes the generally positive period occurring during the last week of the calendar year. Though none provide a full explanation, some popularly cited theories include:

• A boom in consumer spending fueled by holiday shopping and end-of-year bonuses
• Cheery investor sentiment brought on by the holiday season
• A rush by portfolio managers to shed losing investments (thereby locking in capital losses for tax purposes) and reinvest the proceeds
• prior to the end of the calendar year
• So-called “Window Dressing” by fund managers, who seek to own outperforming stocks on their year-end balance sheet

Soon this December will be in the history books as well. We are following markets movements throughout the month to see if we can count this December among those producing a positive return for investors.

Let’s now take a closer look at how we implement these shifts within the various strategies.

The Asset Allocator*

The Asset Allocator strategy adopted a more aggressive stance mid-quarter. In the equity portion of the model, the strategy favors large cap growth followed by mid cap growth, while avoiding the small cap area of the market. Also included in the equity allocation are investments in areas that we view to have some defensive capabilities such as financials, health care, technology and consumer cyclicals – as well as a dollar hedged international position.

Interestingly, while the strategy continues to maintain positions in health care and technology, our analysis led to the replacement of managers in these areas in the quarter. The strategy’s fixed income allocations continue to favor high yield bonds – in light of a likely federal funds rate increase, while maintaining a position in a higher quality intermediate-term bond. The strategy also added a position in emerging markets debt, while exiting a position within an energy MLP investment.

The Portfolio Protector*

The Portfolio Protector strategy adopted a fully-invested position by mid-quarter. At this time, the equity portion of the portfolio is invested in large cap growth, mid cap growth, financials, technology, health care and consumer cyclicals. The strategy does not currently hold a position in international equity. The fixed income component is allocated to US Aggregate Bonds, High Yield Bonds and Emerging Market Bonds.

The Sector Selector*

The Sector Selector continues to maintain its defensive positioning, with a third of the portfolio allocated defensively. This strategy is currently invested in Aerospace & Defense, Consumer Cyclical and an MLP. Contact Absolute Capital or your financial professional if you would like to learn more about deploying our active risk management strategies on other accounts that you may have.