To work out how you are going to invest going forward, I suggest (in Dirty Harry style, but with a Yuletide twist) that you’ve got to ask yourself two questions: Do I feel lucky? and do I believe in Santa Claus?
What we have seen is a great quarter with local stocks up over 6%, which makes you think that this will be hard to be reproduced, but this is the last quarter of the year and the Yanks are famous for their Santa Claus rallies.
In fact, since 1980 the S&P 500 has been up in the fourth quarter 81% of the time. So history is on the bulls’ side.
Of course, even if stocks went up by 2%, it would make a great half-year result and so let’s look at what could be the Grinch that could steal Christmas from stock players.
Potential Grinches
Here they are:
- European leadership, particularly in Spain where austerity protests will pressure the Government to avoid asking for bailout assistance because it will bring fiscal measures the populace won’t like;
- Worse-than-expected economic growth in the European Union, especially in better economies such as Germany;
- China fails to pick up its economic growth, despite a leadership change and this hurts commodity prices and investor confidence;
- The US presidential election result worries Wall Street and rocks investor attitudes to stocks;
- The so-called fiscal cliff takes the US into a recession with a Congress impasse over budget deficit reform that results in automatic tax increases and spending cuts;
- Something stupid happens between Iran and Israel, forcing oil prices up and investor confidence down!
Put all of these potential left-field events up against the big run of stocks since June 5 – which heightens the chances of profit-taking sell-offs – and you could easily see the usual Christmas rally derailed this year.
Setting the stage
Before looking at the alternative case, let’s recap on the year so far.
The Dow Jones is up by almost 10% for the year while the S&P 500 is up 14.6% and the Nasdaq up 19.6%! Locally, our S&P/ASX200 index is up around 8.1%.
Right around the world, stock markets have had a big September even though it’s the worst month for most markets, historically speaking. In fact, October is our worst month, so I hope this is not ominous for us.
Of course, the nice rises this year have been helped by recent central bank action, but note, this came in the September quarter.
Let’s take the Dow, which was up 4.3% over the most recent three months, but the index was up 10% for the year, so 5.6% of the rise came from a general belief that there are other positive drivers for stocks.
If these drivers are real and not linked to expectations of events such as the QE3 stimulus measures, then they have to exert themselves over the next three months. They will have to show up in improving economic data as well as better political outcomes in Europe, the USA and even China, where a new leadership is expected to take control this month.
A Merry Christmas?
So what do we have to see to ensure Santa shows up in December?
What we need to see is some genuine signs that the US and Chinese economies are reacting positively to the stimulus measures recently put in place. It would be good if the EU kicks in as well, but its challenges could take longer to overcome. For Europe, 2013 should deliver better economic data, provided all goes well with what governments can produce.
Overnight, the ISM index, which measures US manufacturing activity, rose after being down for three months. It went from 49.6 – contraction territory – to 51.5, which means the sector is now expanding again.
I’m looking for good economic signs, like the above, which will give us back Christmas.
Last week we saw that US consumer spending rose in August and consumer sentiment reached the highest level in four months.
Lance Lai, our Switzer Super Report’s charts guy sees a short-term pullback and that would not surprise me, but if economic data continues to improve it will be a buying opportunity – a yuletide gift!
Important information: 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. Anyone should consider the appropriateness of the information in regards to their circumstances.
Also in the Switzer Super Report
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- Paul Rickard: SMSFs missing out on overseas opportunities [2]
- Lance Lai: A buying opportunity is emerging [3]