The following was originally published on Kiplinger’s as Don’t Wish for a Santa Claus Rally. Prepare Instead.
Perhaps we should all give thanks that the market is closed for Thanksgiving. It’ll give us a chance to recover from quite a beating – and for some, time to wish for a “Santa Claus rally” to rescue stocks.
It’s rough out there. The November-to-April period seasonally has been the best time of the year to be invested. It looked like that might be the case this time around, too. After a devastating October that saw the Standard & Poor’s 500-stock index drop almost 7%, November started strong.
Alas, it didn’t last.
Stocks started sliding again in the second week of November, and by the week of Thanksgiving they had already taken out the October bottom. As of this writing, the S&P 500 was about 2% away from hitting new 52-week lows.
Is a Santa Claus rally still in the cards? December is a historically strong month, after all. The final month of the year has been positive more often than any other, finishing higher 66 out of the past 90 years. And the market indeed is ready for a reprieve in December following two lousy months in a row.
But don’t hang your hat on Santa Claus coming to town.
Why the Grinch Could Steal Christmas
We’ll start with stock valuations, which never seem to matter … right until they do.
Expensive markets can continue to get even more expensive, sometimes for years. Consider that Alan Greenspan first complained about “irrational exuberance” in the markets as early as 1996. It would be well over three years until the market finally rolled over. Yet when the bubble finally burst in the first quarter of 2000, it got ugly. The market was down 15% by year end and proceeded to lose nearly half its value before it finally hit bottom.
There’s no guarantee the market will follow a similar path this time around. But it’s worth noting that when the S&P 500 peaked in late September, it was actually more expensive than at the top of the 2000 tech bubble, at least as measured by the price-to-sales ratio.
To continue reading, please see Don’t Wish for a Santa Claus Rally. Prepare Instead.