As long as the market does, it will be a Merry Christmas! santa claus rally
We are entering that magical time of year. No, I don’t mean the Christmas season of giving and cheering. I’m talking about that time of year when we have the Santa Claus Rally and the January Effect. The time when investors are usually happiest.
Investopedia defines a “Santa Claus Rally” as a rise in stock prices that often occurs around Christmas. There are numerous explanations for the Santa Rally phenomenon, including tax considerations, happiness on Wall Street, people investing their Christmas bonds, and the fact that pessimists are often on vacation this week. Many consider the Santa Claus rally to be the result of people buying stocks in anticipation of rising stock prices during the month of January, also known as the January effect.
The “January Effect” is defined as a general increase in stock prices during the month of January. This rally is generally attributed to increased buying, which follows the price drop that typically occurs in December when investors, seeking to create tax losses to offset capital gains, trigger a sell-off.
Regardless of whether these facts are real or fictional, much like modern Saint Nicholas himself, there is no denying that this period is generally a good time for investors. In fact, the S&P 500 has been positive 76% of the time during the period from the Monday before Black Friday to the end of the calendar year.
Now, many people believe that the market rally is solely the work of the Federal Reserve artificially inflating the economy through stimulus and quantitative easing. It is difficult to dispute this fact. Just look at every major drop in the stock market; usually it’s because of something scary, like the news that the Federal Reserve is going to take the punch bowl. On the other hand, we see rallies when we get negative economic news, which is a source of jubilation that the Federal Reserve will continue to print money.
I don’t disagree that when the Federal Reserve, either under the leadership of Ben Bernanke or Janet Yellen, starts writing stimulus, stocks will fall. It’s just like I’ve been saying here for months, as well as when I was alone on my last appearance on CNBC, I don’t think there’s any cutback anytime soon. The economy may be improving, but there’s no way it can stand on its own.
The sad fact is that the demographics of our country and the entire developed world will not support an economic recovery for at least another 5-8 years. As I explain in Facing Goliath – How to Triumph in the Dangerous Market Ahead, an economy must have more spenders than savers in order to grow. We know that people spend more in their lives from the age of 30 to 40, peaking at 48 years sold. Unfortunately, our population is well past its peak spending years, and the next generation of spenders big enough to make a difference, the eco-boomers (the children of the baby-boomers) won’t hit their spending peak until 2022.
Ben Bernanke must have seen this coming (yes, I admit I probably wasn’t the only one), which is why he stood up to this and started the stimulus programs, and also why they’re not going away anytime soon. soon.
However, at least two other developments have emerged that have received very little media attention, which makes me optimistic: First, that the US oil and gas boom is beginning to create “localization.” That’s when the factories come back to the US to build. Last week Foxconn, the Taipei-based electronics maker that builds Apple’s iPhone, announced it plans to invest $40 million to build robots in Pennsylvania. American companies often go to Asia to do their manufacturing, but this time it’s the other way around, and it could spell a new trend. Company president Terry Gou says the company wants to be part of the “manufacturing renaissance” in the United States. Hmmm, or should I say wow?
The second development is the recently announced reforms by the Chinese government. Although it has received little fanfare here in the US, many experts compare this to the 1978 revolution, when the “Gang of Four” was ousted and Deng Xiaoping was appointed prime minister. From that time to the present, China has witnessed tremendously successful Western-style modernization, Westernization, and capitalization. Chinese per capita income has skyrocketed, from $100 to $6,000 today, and further liberalizations could bring Chinese living standards up to American levels.
Of course, those are long-term reasons to be merry. In the short term, investors should follow one of Wall Street’s great adages: Don’t fight the Federal Reserve. The fact that the Fed is keeping easy money with low rates shows how hard it is trying to stimulate economic activity. Another reason that is not talked about as much is that they are deathly afraid of deflation, which means they won’t stop until they create inflation. We are probably years before the Fed actually starts raising rates because of a very strong economy. Investors generally shrug off the first rate hikes. It’s not until the Federal Reserve Board raises interest rates at least 3 times before stocks feel pain. This is known as the “3 jumps and one trip” rule. Yes, you guessed it; the ‘stumble’ refers to the stock market.
investor strategy
If you are retired or planning to retire, now is not the time to take excessive risks. Leave that to people in their 20s and 30s. Although I do believe that stocks are poised to go higher, we are long overdue for a correction or a good old fashioned bear market. They are just a natural part of life. Bull markets typically last 48-56 months and we are in our 65th month, so be careful and have your exit strategy ready. The price for being wrong is too high.
You need to be very careful here to invest correctly for the best returns, but with the least possible risk. If you’re in that retirement red zone, you can’t afford to risk it because there isn’t enough time to come back. I urge you to take a look at Springer’s investment approach, which is designed to manage risk and generate return, in any market.