Should Investors Expect A Tax-Driven Stock Market Sell-Off In The Next 2 Weeks?

Investors enjoyed huge returns in the month of November. But after a solid start to December and a historic run off the March lows, some traders are getting concerned about year-end profit-taking heading into the 2020 home stretch.

So far, the SPDR S&P 500 ETF Trust SPY has rallied another 2.2% in December and the SPDR Dow Jones Industrial Average ETF Trust DIA is up 1.8% month-to-date. November’s 10.8% gain was the best month of November for the S&P 500 since 1928.

While it may seem appropriate to be on the lookout for a correction following such a strong month, history suggests otherwise. Since 1974, the S&P 500 has gained at least 10% in a single month 12 times. Of those 12 instances, the average return during the following month was positive 0.6%, according to LPL Financial.

Related Link: What Traders Need To Know About The Historic S&P 500, Nasdaq 100 Rebalancing

Santa Claus Rally Coming? The month of December has been a historically strong month regardless of what occurs in November.

Since 1950, December has been the second-best month of the year for the S&P 500, trailing only November.

More recently, that trend hasn’t held up as well, with the overall December returns weighed down by a 9.2% drop in 1998.

In a typical year, the S&P 500 returns an average of 1.5% for investors. Investors looking for December profit-taking may see the exact opposite. When the S&P 500 is up at least 10% year-to-date, that average December gain increases to 2%.

Stocks have also historically performed well during the last five trading days of a year through the first two trading days of the New Year.

This seasonal outperformance is known as the “Santa Claus Rally.” Since 1950, the S&P 500 has generated a positive return during the Santa Claus Rally period exactly 79% of the time.

Benzinga’s Take: The one place investors may see weakness in the last two weeks of the year is in some of the worst-performing stocks of 2020.

By dumping these stocks before the end of the year, investors can offset some of the capital gains they have logged in the 2020 tax year, a practice known as tax loss selling.