Stocks jump: Is this the Santa Claus rally?
A surprisingly good report from the U.S. housing market, combined with better-than-expected German sentiment, pushed up U.S. stocks by nearly 3 percent. Is this the beginning of the Santa Claus rally? Keep in mind that the rally occurred on paltry, pre-holiday volume, so let's not get too carried away.
What about all that good data? Housing starts in November were up 9.3 percent from October, most of which was for multi-family starts, but single family starts were also up 2.3 percent. While I would really like to see the housing market turn, it's important to note that the improvement that everyone is giddy about comes from a very low level. As the great Caculated Risk blog notes, "Single family starts are still mostly 'moving sideways.'"
The upbeat news out of Germany was a sentiment indicator called the Ifo business-confidence index. It rose unexpectedly in December, as German firms described their current business situations as favorable. Of course if the whole Eurozone collapses on itself in 2012, a possibility for sure, that sentiment could change pretty quickly.
Just yesterday, the European Central bank released a report that warned that not all is well in Euroland. In its bi-annual Financial Stability Report, the ECB said "the sovereign risk crisis and its interplay with the banking sector worsened in an environment of weakening macroeconomic growth prospects...Ultimately, the transmission of tensions among sovereigns, across banks and between the two intensified to take on systemic crisis proportions not witnessed since the collapse of Lehman Brothers three years ago," the report said. TRANSLATION: things in Europe got a lot worse in the second half of 2011 and the global financial system has not been this bad since the Lehman Brothers bankruptcy in the fall of 2008.
The scenario described by the ECB is not one which negates the possibility of a year-end rally, but it does call into question the sustainability of it. So before you put the buy orders out for Santa, be careful. I could be
writing about an equally steep decline tomorrow if the news changes only
slightly. For the last seven trading sessions of 2011 - and until the European debt crisis is finally resolved, investors would be wise to channel the immortal Bette Davis: "fasten your seat belts its going to be a bumpy night".
