The year is drawing to a close and the stock market’s performance for 2011 is coming down to whether European leaders or Santa will have a final say in the markets for the year. With the S&P 500 basically on a sideways movement for most parts of the year, the final weeks of December has become key to the whole year’s performance for stock market indices. The S&P is hovering around 1260 at the time of the blog. The Dow is the only real winner, up about 5% for the year. The Nasdaq was down 0.1% for the year. Analysts have opined that there is a potential for the old-fashioned, year-end Santa rally. But for the Santa rally to occur, the EU summit on Friday needs to end on a positive note, with a unified Europe moving towards a plan to stem the sovereign debt crisis.
For the stock markets, the month of December has historically been a positive month, moving higher 81% since 1990 for an average gain of 2%. Investors are sounding like they’re picking up on the Christmas spirit and that should definitely help the markets for a bullish rally. On the contrary, strategists don’t expect the rally to extend much into 2012. Several see relatively small gains for next year as the US economy grows slowly, Europe potentially slides into recession and China risks a hard economic landing.
Some strategists are of the opinion that the focus is entirely on Europe for this week with Santa stepping onto the platter later on next week. Fund manager’s behavior at year end is obviously also driven by the market’s performance. In bad years, there’s more pressure on the part of the portfolio managers to dress up the portfolio. In good years, you’re chasing to benefit from the rally.
The ‘Almanac’ describes a year-end rally as a ‘short, sweet, respectable rally’ within the last days of the year and the first two days of January. It confirms the rally has provided an average gain of 1.5% gain since 1950. The year 2011 will be remembered as the time where all the adages were occurring as the year developed. The ‘January effect’, where the S&P posted a 2.3% gain in January, ‘sell in May and go away theory’ theory and the ‘October bear killer’ all worked this year. On October 3rd, the market reached their bottom, ending the 19% peak to trough decline from the April 29 year high. The trigger for a year-end rally would be a rebound in investor sentiments as Europe averts a financial crisis; improvement in the job market and the holiday shopping season surprise to the upside, as it did last year. Santa Claus may indeed be coming to town!