A December To Forget For Equity ETFs

Historically, stocks perform well in the month of December, but that reputation was betrayed in significant fashion in 2018.

On a total return basis, which includes paid dividends, the SPDR S&P 500 ETF SPY, the world's largest exchange traded fund, lost 10 percent last month. Underscoring the weakness in U.S. equities to end 2018 is the point that SPY was far from being the worst offender among domestic broad market ETFs.

What Happened

Another point paints the picture of just how bad things were for U.S. stocks last month: the only other December on record that was worse for the S&P 500 than December 2018 was December 1931 when the index tumbled 14.5 percent.

“However, the widespread losses across sectors, styles and sizes in the broad U.S. equity market was remarkable with every major segment down in December,” said S&P Dow Jones Indices Managing Director Jodie Gunzberg in a recent note. “Only 9 times in history has every segment of the U.S. equity market lost in a month (with all sector data starting in 1995 and style data in 1997.) Those months were Aug. 2015, Sep. 2011, May and Jun. 2010, Jan. and Feb. 2009, Oct. 2008, and Jul. and Sep, 2002.”

Why It's Important

As Gunzberg points out, mid- and small-caps weren't immune from the December downdraft. The iShares Core S&P Mid-Cap ETF IJH, which tracks the S&P MidCap 400 Index, dropped 12.1 percent on a total return basis last month. The iShares Core S&P Small-Cap ETF IJR, which targets the S&P SmallCap 600 Index, fell 12.7 percent in December.

“Not only was every segment of U.S. equities negative in December but 33 of 42 segments had their worst December ever,” said Gunzberg. “For the 9 other segments, 7 recorded their 2nd worst Decembers and 2 had their 3rd worst Decembers.”

For IJH and IJR, December 2018 was the worst December on record for those ETFs and that's saying something because both funds have lengthy track records, having debuted in May 2000.

What's Next

That's hard to forecast, but the Health Care Select Sector SPDR XLV and Utilities Select Sector SPDR XLU were among the sector ETFs that held up fairly well last month.

“What’s next for equities is impossible to know for sure, especially when there has only once been a December this bad,” said Gunzberg. “While the year ended down 6.2% for the S&P 500, its worst in a decade, there were 22 years prior with worse returns.”

History suggests January rebounds often follow dismal Decembers on par with December 2018, but there are some instances in which a bad December was followed by January declines.

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