So far there has been neither (reindeer) hide nor (snowy white) hair of Santa this December. The Grinch, on the other hand, has hardly been scarce and month-to-date, through the 11th, the S&P 500 and the Dow Jones Industrials have contracted -3.19% and -2.43%, respectively. Bonds have not been a particularly great place to be either, the WisdomTree Barclays (L:BARC) US Aggregate Bond Zero Duration (O:AGZD)Index consisting of investment grade taxable bonds is down -0.29%. As Scrooge would say, bah humbug!
Most people are familiar with the phrase “Santa Claus Rally”, coined by the Stock Trader’s Almanac publisher Yale Hirsch in 1972 to describe the frequent short-term rally in the last five days of December and the first couple of days in January. There are several reasons thrown around for the Santa rally, the most intuitive being tax considerations; investors harvesting tax losses early in the month and then possibly reinvesting proceeds. There is the window dressing theory – portfolio managers attempting to bolster year-end statements by adding stock out-performers. And we also have the premise that people are just plain happy from the celebratory nature of the season and that short-sellers go on vacation (really?).
In any case, according to the Stock Trader’s Almanac, since 1969, the S&P 500 has averaged a 1.4 percent gain in the Santa Claus rally. So while we are a little early for a visit from the “jolly elf”, the question remains, will he be a no-show this year?
Here are some Pros and Cons on Santa showing his happy persona, you will notice that most of these end up on both sides:
PROS
- The Fed finally putting everyone out of their misery with an actual decision on a rate hike on December 16th
- Extremely low energy prices fueling the consumer to spend (retail, restaurants, travel) and benefiting some industries such as airlines, trucking, package logistics, etc.
- 2016, one step closer to a U.S. presidential election – possibly a harbinger of opportunity?
- Positive corporate guidance. So far, FactSet data shows that of the 109 companies that have issued forward guidance for the fourth quarter, 83 have announced negative EPS guidance and only 26 have issued positive EPS guidance.
- Tax loss selling should be about over
CONS
- Fed’s upcoming December meeting and possible rate hike on December 16th further spooking the markets and precipitating an economic slow down
- The effect of continued falling energy prices on the energy sector and the stock market
- 2016, one step closer to a U.S. presidential election raising uncertainty (fear?) and speculation on many fronts
- Negative corporate guidance (see above in pros)
Although it would certainly be satisfying to see a Santa Claus rally. As we have stated many times, investors should focus on the long-term determinants of equity portfolio return, including earnings and revenues, valuations, leverage, diversification (and dividends are nice too). Alhambra’s clients will not be seeing any new high flying stock positions at the end of the year. Window dressing serves them with no financial benefit. Our clients have always been counseled that, in the short run the equity markets’ performance is often a flip of the coin; however, a diversified portfolio that meets an individual’s risk parameters, objectives and time horizon will serve them well in meeting their goals.