Dear Clients and Friends,
The 1972 Stock Trader’s Almanac mentioned a pattern that happened in December where markets tended to end the year with a rally. They coined these phenomena, “The Santa Claus Rally”, and it has since become part of Market Lore. The basis for this effect is known by many investors as a “calendar effect”, where certain parts of the calendar have an often-repeatable effect upon prices, namely stock prices. Yet, the calendar effect can be seen in commodities, cars and even homes; so it is not by any means a stock market phenomena. For example, unleaded fuel prices tend to rise in the Spring and Summer in anticipation of the Summer travel season. In the market, the Santa Claus rally usually results in appreciation of stocks in December and peaks the last week of the year as fund managers window-dress their fund holdings and investors front-run the slug of money that flows into the market in January (This is another effect known as the “January Effect” 😊).
Right now we are experiencing the opposite of a calendar effect, and it has the bulls and bears battling over the narrative. The bears control the narrative, with talks of interest rates/Fed, Trump/’Trade War’, and an inverted yield curve. If it were just one of these items the market would quickly discount the risk and move on. However, with the culmination of these risks and uncertainty surrounding each one, the Bears have garnered considerable downside momentum going into the year end. The Bulls have been dealt a blow this year, but they have not been completely silenced.
The reason the Bulls have not been silenced is because each of the uncertainties, or risks, have potential good outcomes. The Fed could reach the conclusion that they are going to pause thereby reducing risk of raising rates too far, too fast. Trump could end his trade war with China and bring back a more equitable Trade agreement that the market applauds. And the yield curve could steepen as longer term rates rise in anticipation of inflation and further growth. Each one of these could be viewed as optimistic today, or hopeful, but I think the probability of at least 2 out of 3 coming to fruition is likely. And there is the argument that as earnings have risen this year and most stocks have gone down, the valuation of the market is much more reasonable today.
Over the last year the market has been a ‘1-trick-pony’, buy growth and technology and make money; buy anything else and tread water or drown. Almost everything outside of US growth has experienced some level of pain, and this has resulted in the diversified investor severely under-performing. There is also a generation of younger investors now that have only experienced a market that tends to go in one direction, and that direction is up. These younger investors and managers have come of age in a period where the internet economy looked very promising and the stocks involved have done nothing but make money hand over fist. But what happens when the market begins to show cracks, and the ‘sure things’ like Amazon and Netflix become questionable?
The market is currently dealing with a normal healthy process between the Bulls and Bears. This year started with the market making new highs weekly, and it looked like nothing could go wrong. As the year is coming to a close, the market is making weekly lows and it appears that everything is suddenly imploding. Markets get emotional, but investors stay emotionless in light of these gyrations. I think it is fair to say that the market was too optimistic at the beginning, and may be too pessimistic as the year ends. Famed billionaire investor, Stanley Drunkenmiller once quipped, “I believe that good investors are successful not because of their IQ, but because they have investing discipline.” I am hopeful that ‘Saint Nic’ returns prior to year-end to give us a parting gift for 2018, but I am also cognizant that a ‘lump of coal’ could be the outcome of this year-end, and I am not the bit perturbed. We stick to our guns in times like these and make rational decisions based upon goals and risks; knowing that outcomes are measured over market cycles rather than a month or quarter. Have a wonderful Christmas and an Joyous New Year.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All investing involves risks including loss of principal. No strategy assures success or protects against losses.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.