Is A Santa Claus Rally Looming?

Posted in: Economics, General, Stock Market, Thought of the Week

During this time of the year, the media starts to focus on the idea of a “Santa Claus” rally. The term is used to describe the rise in equity markets often experienced during late December, particularly between Christmas and New Year’s Eve.

As long-term fundamental investors, our Investment Committee does not believe in the idea of buying stocks purely in anticipation of a Santa Claus rally. However, leading academics and market pundits have four reasons that could explain this trend:

  1. The “January Effect”: A seasonal trend in the financial markets where prices often increase during the month of January. The thought here is that money managers will buy stocks in December in anticipation of the January Effect.
  2. Tax Considerations: Money managers often attempt to lock in tax reductions by selling some stocks and buying others.
  3. Emotional Wall Street: Investors tend to be more emotional during the holidays, bonuses are paid this time of year which are often immediately invested, and many traders and other market participants are on vacation which removes some liquidity in markets.
  4. Window Dressing: During late December, large money managers often buy stocks that have performed well all year so their year-end holdings report shows exposure to the outperformers.

Our Investment Committee will not get caught up in the idea of a “Santa Claus” rally and continue to purchase equities based on fundamentals for the long-term.

Ben Bernanke and the Fed finally announced last week that they will begin tapering their $85 billion/month bond-buying program known as Quantitative Easing (QE). The market welcomed this news with equity indices closing at all-time highs. Our Investment Committee expects to see the Fed wind down QE by the end of 2014. However, this zero interest rate environment will likely persist for longer than most had expected. Therefore they expect equities to continue as a major source of income for 2014/2015.

Read this week’s Thought of the Week to learn more about the Santa Claus rally and recent tapering announcement by the Fed.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.