These grinches could steal a stock rally

Founder and Publisher of the Switzer Report
Print This Post A A A

History points to Wall Street often bringing a hip pocket gift for Christmas nicknamed a Santa Claus rally. It happens between the big festive day and New Year and there are a number of real-life causes, such as people investing their end-of-year bonuses, tax reasons and optimism linked to the holiday season. And then there is the January Effect.

This happens because many investors will dump stocks in December to create losses to offset capital gains, which in turn leads to re-buying in January. Going back to 1928, Forbes magazine says Wall Street has increased at twice the weekly rate over that time during this period!

So given the very high expectation of a rise in late December, the question is: could Christmas be stolen by some grinch this year?

The grinches 

Let’s line up the usual suspects and rate their likelihood of killing the Santa Claus rally.

The eurozone and the Spanish as well as the Greeks look like the most villainous in the piece. Fortunately, few people care about the Greeks, though recently their parliament has shown relative unity on austerity measures. The politicians in Athens are debating their budget measures right now, but they did pass laws this week to sack 125,000 civil servants by 2016!

As for Spain, all was looking good for their bond auctions to raise funds until Thursday when the five-year raising was not well-supported, which pushed up Spanish and Italian yields. The markets want Spain to ask for a bailout to give lenders comfort that the European Central Bank (ECB) will play rescuer. This will have to be watched over the next few weeks.

Now we should give China a once over and here because I have few worries. Even so,  economic readings are looking up for the dragon economy. Retail sales in October were up 14.5% on a year ago (slightly above consensus expectations of 14%), while industrial production was up 9.6% (consensus 9.4%) and fixed asset investment over the first 10 months of 2012 was up by 20.7% (consensus 20.6%).

And this is all happening with inflation at 1.7%, which screams out loud that China is recovering nicely without inflation and with a new leadership bound to want to impress its followers, I can’t see our Communist buddies getting in the way of Santa.

So, now to the USA, which economically-speaking is also recovering nicely. On the stock market front, last week we learnt that after about 80% of S&P 500 companies had delivered earnings, more than 61% beat expectations. Reuters said the figure was around the 62% quarterly average that has occurred since 1994, but below the 67% average of the past four quarters.

Considering this took into account a worrying period for the global economy and markets, which resulted in a third US quantitative easing package (QE3) and ECB boss Mario Draghi’s “whatever it takes” promise, this result was pretty good.

That said, the USA, its Congress and it re-elected president remain the biggest threat to a Santa Claus rally. Together they could push the US economy over the fiscal cliff, which would force the Yanks into recession and probably lead to a 10-20% slump in stocks! It’s serious and if Congress is still arguing over Christmas then you can forget a rally.

The bottom line

Against this worst-case scenario, I think we’ll see a resolution before Christmas and stocks will spike. Ahead of this there could be a lot of ducks and drakes played, which market smarties will use to hurt stock prices, but I think they will be short-term buying opportunities.

If you believe me, then you must understand that my argument rests on US politicians acting sensibly. This might be a big call, but I’m prepared to punt on it.

I did like that the Dow was up on Friday, even if it was only by 4 .07 points. The S&P 500 was up by 2.34 points, but there’s bound to be some issues for nervous players in coming weeks.

I will be hanging up my stock market stockings and I expect Santa to deliver, which will roll into a pretty good January.

Bring it on Santa! Bring it on!

Stop the press!

  • Greece’s ruling coalition secured enough votes in parliament on Sunday to approve the 2013 budget law, which was a crucial requirement for Athens to revive its stalled international bailout program and avoid insolvency.
  • Gary Stone of Share Wealth Systems thinks a big share sell-off is in the wings. The fiscal cliff negotiations can be the only cause. His views could be a tad too dramatic, but if you are worried and you trade short-term, it might be worth noting.

For me, any sell-off over the next few weeks will be a buying opportunity. Jamie Dimon, the boss of JPMorgan thinks if the fiscal cliff is solved, the US economy will “boom” in 2013!

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also in the Switzer Super Report

Also from this edition