11/22/2011 1:05 PM ET|
5 signs a Santa rally isn't coming
The chance of a year-end gift from the market always gives investors hope at this time of year. This year, though, the odds are slim. Here's why.
Just like little boys and girls now hanging their stockings by the chimney with care, many investors are hoping for a little holiday magic after a hard year. Unfortunately, a lump of coal is much more likely to be waiting for traders by Christmas than any so-called "Santa rally" that would boost their portfolios.
The Santa rally is one of those seasonal trends that market timers like to tout. One theory is that year-end rebalancing adds to buying pressure across most asset classes through the turn of the year. Others think the boost is caused by year-end bonuses being pushed into the market, or that it is a purely psychological rally, thanks to the general goodwill of the season (and the fact that many bears and short-side traders are on vacation).
But the idea of a market rally every December is suspect even in a good year -- and particularly troublesome in 2011.
Here are five signs that the so-called Santa rally will not happen this holiday season:
Dangerous December generalizations
In a 2009 column on this year-end phenomenon, columnist Mark Hulbert crunched numbers and found that December's "average" strength fails to account for severe volatility. "That's sort of like the man whose head is in the oven and whose feet are in the freezer and who, on average, feels just fine," Hulbert wrote.
Yes, the market generally goes up. How else did we get from Dow 2,500 in 1991 to Dow 11,500 now? And generally the market also goes up more in December. Since 1896, the Dow Jones Industrial Average ($INDU)has tacked on an average 1.2% each December compared with 0.5% gains averaged in the other 12 months.
But that's not entirely fair. Taking each month separately, June and July have slightly better average monthly returns than December -- so much for another market truism, "sell in May and go away!"
In short, investing based on generalizations is a dangerous tactic. Try selling investors on that "average" long-term performance of the Dow right now, and you probably will get laughed out of the room. Why would you manage your portfolio in December based on the same flawed logic?
Debt deadlines loom
The sovereign debt crisis in Europe and the failure of the U.S. congressional supercommittee are stark demonstrations of political gridlock and intransigent citizenry on both sides of the Atlantic.
That brinksmanship and dangerous rhetoric appear to be spooking the market, just as did the debt-ceiling debate over the summer that ultimately resulted in a downgrade to the U.S. credit rating and caused the market to plunge 15% in late July and early August.
Too many big issues are at play this holiday season for the markets to get their typical break from big news, and more bad headlines could further sour attitudes on Wall Street. The pain of the supercommittee's failure is already being felt, and even if the eurozone can break through its current spiral of debt-related problems, the market might react even more severely in the days before any such deal is struck.
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Gas, food, and healthcare costs ate our x-mas this year.
Work is slow and all our increased costs have made for a "squeek by" year and we will see no x-mas party or bonus's this year.
That lump of coal is exactly what Wall Street deserves, go choke on it.
Until unemployment moves down significantly, the backlog of bank-owned properties is drawn down and home prices move upward, there will be no rally ~~ Santa or otherwise.
Yep .. and the USPS is closing the post office just down the road from Santa's house too..
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