As we are on the eve of Thanksgiving and Christmas holiday shopping season, you’re about to get inundated with ridiculous expressions like “Santa Claus rally” and market superstitions that would have you believe that the price action on the first trading day of the year—January 2—will determine the returns on the market for all of 2014.
It’s hard to believe that grown men and women peddle nonsense like this, but the financial press is flooded with it every year.
To be fair, December and January tend to be good months in the market, with average returns of 1.8% and 1.7%, respectively, according to a study that Ken Fisher did in The Only Three Questions That Count. But July had the best returns of any month, at 1.9%, making “sell in May” look like pretty terrible advice.
My advice? Ignore these little bits of Wall Street “wisdom” as they pop up. Market seasonal patterns, to the extent that they exist at all, are by no means guaranteed, and in most cases are not investable. For most investors, whatever they gain in added return due to over or under weighting based on seasonal patterns will be more than lost in taxes and trading expenses.
Instead, focus on powerful and—importantly—investable macro themes such as the ones we cover in this newsletter. Hold on to your investments for as long as the macro themes remain intact and as long as they are attractively priced. Sell when the theme has run its course or when you’ve hit your selling criteria—such as having a stop loss triggered by a falling share price.
Update on Europe
The U.S. markets are on fire this year, on track for one of their best annual returns since the go-go 1990s. But the pieces are quietly falling into place for a monster rally in Europe in the year ahead. As I wrote in last week’s update, European stocks are priced to deliver far better returns than their American peers.
If you missed last week’s update, I recommend you give it a look today. You might want to print it out and keep a copy handy, because the relative valuation theme is one I intend to return to over the next several months.
European stocks are cheap; even most bears would reluctantly admit this. But cheap assets are often cheap for a reason, and in the case of Europe the reason is a nagging fear that the Eurozone could slide back into crisis at any time.
I’ve been very consistent in my view that Europe would always pull back from the brink when it looked close to jumping over.
Europeans may hate the austerity policies of recent years, but they still believe in Europe. And their entire political class has staked its career on European integration. Like ECB President Mario Draghi, Europe’s leaders will ultimately do “whatever it takes” to make the EU and its currency work.
There are still risks, of course. Italy still has no credible plan to return to growth and to pay down its massive sovereign debts, and Eurozone banks have a wave of loan refinancing in front of them that could restrict new lending and slow down Europe’s economic recovery.
Bank lending (or lack thereof) is an ongoing problem, and it’s not one that going to get fixed tomorrow. But looking at government bond yields, the market seems to be confirming what the ECB said about indicators of systemic risk. After rising during the “Taper Tantrum” that started in May, Spanish yields have drifted back to near three-year lows (Figure 1), and Italian yields are not far behind (Figure 2).
Could Europe slide back into crisis? It could happen, but I wouldn’t bet on it. The bond markets are giving us the all clear for now. If there is to be another round of Eurozone crisis, it won’t be happening any time soon.
Along these lines, I want to reiterate my buy recommendation on our Spanish “emerging markets lite” holdings, Telefonica (TEF), Banco Santander (SAN) and BBVA (BBVA). We enjoyed a nice rally in all three earlier this fall, and I recommend using the recent lull as an opportunity to accumulate new shares.