Santa Claus rally or stocking full of coal?
Finally, yesterday, we saw the first sign of the usual year-end Santa Clause rally. But so far, U.S. stocks as measured by the Wilshire 5000 Total U.S. stock index is still down 0.4 percent for the month and 0.7 percent for the year. The good news is that the strongest week in December is typically the week between Christmas day and New Year's day. Will Santa deliver his holiday cheer this year? Here's my take:
A recent Forbes article notes the Santa Claus rally has resulted in an average December market gain of 2.0 percent since 1990. Roughly 81 percent of the time, stocks have risen in December since 1990.
The explanation most often used is that investors are buying stocks in anticipation of the January effect, where stocks typically rise as well. Another explanation I've read asserts that stocks increase in January as a result of investors buying back the stocks they sold in December to harvest the tax losses.
Why no rally so far this year?
Word on the media street is that the lack of a December rally is due to the European debt crisis and our dysfunctional politicians. Though these certainly don't help the market, are they really the cause?
Perhaps the Santa Claus rally is yet another example of the human ability to find patterns out of randomness. Maybe it's no better than the Superbowl indicator or butter production in Bangladesh. Or perhaps its real and investors acted so much in anticipation that it was part of the reason stocks surged in October.
My take:
Don't get me wrong, I find myself wanting to believe in the Santa Claus rally as much as the next investor, but it has been a long time since I believed in either Santa or the tooth fairy. And even if a pattern is real, once it's discovered, it goes away as investors try to exploit it. You can be sure that if I ever discover a pattern I can get rich on, I won't be writing about it. I'll be getting rich from it.
It's not my intention to be a Scrooge who bah-humbugs away anyone's hope to gain wealth by just investing in December. Actually, dashing hopes based on investing myths is something I do year-round. Remember, I was the guy who told readers not to bet on the January stock barometer that had the media telling you it was going to be a great year for stocks.
Investing for the long-run may not be as emotionally rewarding as betting on Santa Claus or other historic patterns. It is, however, far more profitable.
I hope the market goes up next week. I can live with reading the media articles attributing it to Santa Claus. I can also live with readers telling me how wrong I was on this piece.