The weather is getting colder and the holidays are just around the corner. From Thanksgiving to New Year’s, the next several weeks are a cheerful time for people across the country.
It also tends to be a cheerful time for markets. The proverbial "Santa Claus" rally is not a myth. While it's never a guarantee in any particular year, the market has historically rallied during the holiday period.
In fact, December is the best month of the year for gains in the S&P 500, with an average increase of 1.67 percent for the index. That's followed closely by the average increase of 1.53 percent for November (the second-best month), and 1.09 percent for January.
Perhaps this seasonal pattern is a reflection of investors' optimism about the New Year. Or perhaps peoples' cheerful mood in the real world filters into their investment decisions. We can only speculate about the reason.
But while it's an open question why the overall market climbs during the holidays, for certain sectors within the market, it's obvious. There are holiday plays that are direct beneficiaries of the winter months.
Though retail sales have been getting less seasonal over the past few decades, the holidays still remain the most important time of the year for most stores. All retail segments typically see a seasonal increase in sales during December, with the exception of autos, gas stations and building materials, according to a report by Deloitte University.
Of course, it all comes down to expectations. Retailers are already expected to see a bump in their sales during this period, so in order for them to outperform, sales must exceed what the market is anticipating.
Shares of Macy's plunged by 14 percent on Wednesday after the company issued disappointing guidance. But overall retail sales are expected to be strong, with the National Retail Federation forecasting an increase of 3.7 percent over last year in November and December, above the 10-year average of 2.5 percent.
For investors, exchange-traded funds allow investors to easily diversify their exposure and avoid single-stock risk, but choosing which retail ETF to buy makes a big difference. Case in point: The Market Vectors Retail ETF (RTH | A-79) is up 6.6 percent this year, while the SPDR S&P Retail ETF (XRT | A-51) is down 6.7 percent.
YTD Returns For RTH, XRT
RTH's large exposure to the surging online retail juggernaut Amazon.com has served it well this year, while XRT's exposure to smaller-cap stocks through its equal-weighting scheme has been a negative.
With people increasingly doing their holiday shopping online, RTH's exposure to Amazon may allow it to continue to outperform.
More of a winter play than a holiday play, natural gas is one market that usually sees an uptick during this time of the year. The fuel―primarily used for heating and cooling needs―always sees its demand peak during the winter months.
Because the risks of a frigid winter could send inventories to critically low levels, natural gas often commands premium pricing in the coldest months of the year: December, January and February.
However, that historical pattern has been turned on its head this year, with prices close to decade-lows heading into winter. That's because, much like the oil market, the natural gas market is flooded with supplies from prolific U.S. shale wells.
Stockpiles hit a record high last week, according to the Energy Information Administration. Making matters worse, the winter cold has been late to arrive for the Eastern half of the country.
For natural gas to see its typical seasonal bounce from here, temperatures will have to drop fast, and significantly. If that happens, the futures-based United States Natural Gas Fund (UNG | B-94) and the equity-based First Trust ISE-Revere Natural Gas ETF (FCG | B-95)―both down big this year―could see a short-term rebound.
YTD Returns For UNG, FCG
Longer term, a lot more has to happen for natural gas prices to see a sustainable rebound.
Another industry that sees an increase in business during the holidays is the airlines. It's true that the summer months are the busiest time of the year for air travel, but there is a notable uptick in December as people use time off to travel both domestically and internationally.
Airlines may also benefit from continued low oil prices, which reduce fuel costs significantly, bolstering the bottom line for these companies. Indeed, most airline stocks have been on a tear for years now, but it was only this year that investors were able to buy into the space with exchange-traded funds.
The U.S. Global Jets ETF (JETS | D-27) debuted in April and offers broad-based exposure to the industry. Jets have increased 5.1 percent since inception.
Returns For JETS Since April 30. 2015
Leisure And Entertainment
Of course, in addition to travel, people spend a lot of money on other things during the holidays, including resorts, cruises, and other forms of entertainment. The PowerShares Dynamic Leisure and Entertainment ETF (PEJ | B-17) offers exposure to this sector by holding companies like Disney and Carnival, in addition to airlines such as Delta and American.
PEJ weights its holdings based on several factors, attempting to outperform the traditional market-cap-weighting approach. So far this year, the ETF is up 6.5 percent.
YTD Return For PEJ
Contact Sumit Roy at [email protected].