Can markets hold to winning December tradition?

01Dec11

NEW YORK – December is the month for stock market gains. But a Santa Claus rally on Wall Street is not gift-wrapped, with Europe’s debt crisis and political gridlock in the USA acting as potential Scrooge-like downers.

December has long been the seasonal champ in stock performance, S & P Capital IQ says. It’s been No. 1 since World War II. It has topped the charts since 1970, the year Simon & Garfunkel’s tune Bridge Over Troubled Water was the best-selling song. It’s been tops since 1990, when anti-apartheid leader Nelson Mandela was released from prison.

Since 1990, stocks have finished higher 81% of the time in December, vs. an average of 61% for all months.

“They don’t say ‘It’s the Most Wonderful Time of the Year’ for no reason, right?” Paul Hickey of Bespoke Investment Group said in a note to clients.

December gains would be pretty much guaranteed again this year, if not for the chance of Europe imploding and causing financial mayhem similar to the U.S. crisis in 2008 triggered by Lehman Bros.’ collapse.

On the bullish side, better-than-expected economic data lately have lowered the odds of a U.S. recession. Black Friday and Cyber Monday retail sales were strong. The latest readings on leading indicators and existing home sales topped forecasts. Consumer confidence also rose this month, the Conference Board said Tuesday.

“Will December seasonality be overshadowed by Europe? That’s the question,” says Pat Adams, Dunham Loss Averse fund portfolio manager.

There are risks, given the “unprecedented times” we’re living in, says Sam Stovall, chief equity strategist at S&P.

•Headline risk: “The market is being held hostage to headlines,” says Stovall. Investors are likely to sell if news from Europe suggests financial contagion can’t be avoided and policymakers are unwilling or unable to stem the crisis.

•Political risk: Legislative gridlock in the U.S. could also rock markets after the deficit-cutting supercommittee’s failure this month to come up with cuts of $1.2 trillion over 10 years. If lawmakers don’t extend the payroll tax cut or unemployment benefits by the end of the year, it could crimp growth and spark selling.

Adams thinks the stocks would be “a lot higher if Europe was not in the way.” He points to a market selling at attractive levels, an economy showing signs of life and pessimism about the outlook, which normally equates to a buying opportunity.

Source: USA Today, November 29, 2011

Learn more about Ron Sloy.

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