Analysts look for Santa Claus rally

It’s called “seasonal strength” and December is expected to be another strong month on the stock markets. Indeed, the S&P/TSX Composite Index has been up 43 of the last 49 Decembers, posting the strongest average return of any single month, with the least volatility, says George Vasic of UBS Investment Research.

“We believe this reflects the plethora of outlook reports that are issued — usually positive — at this time, as well as forecast horizons being extended another year, which also tend to be rose-coloured,” Vasic said in a recent research report. “This represents a very attractive combination for investors, and has been mirrored in the U.S. as well.”

Despite rising yields and slowing earnings, Vasic projects the TSX will end 2005 at 11,500 points. Tax loss selling is a factor some investors believe can potentially undermine performance in December. But Vasic says this fear has been overstated historically and is unlikely given the market’s strong gains over the last few years.

U.S. economist Dr. Mark Skousen notes that Yale Hirsch first coined the term “Santa Claus rally” in his book, the Stock Trader’s Almanac,, when he found that stocks tend to advance, sometimes sharply, from the day after Christmas to the first two days after New Year’s.

“But that was back in 1966,” says Skousen. “Here’s the kicker: Just as retailers have extended the Christmas shopping season to Hallowe’en, the Santa Claus rally has been extended by traders to cover the final two to three months of the year.”

“In the past eight years, November and December have been extremely bullish,” he says. “Even during the bear market from 2000-2003, stocks rallied in the final two months.”

Skousen says he expects U.S. markets to continue to rally in the current environment of low interest rates, strong corporate earnings and easing inflationary pressures. “In sum, the outlook for holiday merriment is better than ever.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com