Get ready to hitch the bull to Santa's sleigh
By Pierre Belec
NEW YORK, Dec 3 (Reuters) - It's the most wonderful time of the year, so says the Christmas tune. And, it's also a seasonally strong time for stocks, which should put Wall Streeters in good spirits going into the New Year.
Over the last half century, the market has perked up nicely in the final weeks of the year.
It happens for many reasons. For one, trading activity tapers off after the big shooters -- the mutual fund traders -- close their books before the end of the fourth quarter. The resulting lack of two-way liquidity creates a market vacuum that usually favors the bulls.
``'The Santa Claus rally' will happen this year,' said John Manley Jr., senior equity strategist for SalomonSmithBarney. "One of the market efficiencies that doesn't go away is the flow of money in the final days of the year.
``The other thing that does not change are people -- the procrastinators, who tend to wait until the last minute and put a lot of money into stocks in December because it's their last chance to get tax deductions for IRAs,' he said.
This year the rally came ahead of schedule as stocks soared in November, with much of the strength tied to bargain-hunting after a headlong drop of 1,300 points in the Dow Jones industrial average between September and mid-October.
The early fall selloff was spurred in part by investors' jitters over the phenomena known as the Year 2000, or Y2K, computer bug, which was viewed as a big threat to the global financial system.
The technology-laced Nasdaq Composite Index put on a spectacular show in November as it rocketed more than 12 percent. The index, which measures the performance of some 5,000 stocks, is now up and eye-popping 58 percent so far in 1999, putting it on track for its best year since 1991.
The Standard & Poor's 500 Index rose nearly 2 percent in November and has raced up 15 percent for the year while the
Dow gained 1.4 percent last month and is up 21 percent so far this year.
``People got ready for Y2K a little early and they thought it was smart to buckle down in October,' Manley said. ``Then, it sank into their minds that the year does not end in October and it was time to recommit money into stocks.'
The current thinking on Wall Street, which is always subject to change, is that Y2K will be a non-event.
November's big market move drew a flood of cash into mutual funds.
The private forecast services firm Mutual Fund Trim Tabs estimated that through Nov. 26, $31.4 billion of net flows went into stock funds in November, which would be a record. In October, stock funds sucked in $20.42 billion in net new cash, according to the Investment Company Institute, a trade group for the fund industry.
Could there be some unpleasant surprises in Santa's goody bag? Yes. An Ebenezer Scrooge called Federal Reserve Chairman Alan Greenspan.
``There are two potential culprits standing in the way of the Santa Claus rally,' said Manley. ``Strong interest rates and a strong economy could cause real problems for the market.'
The central bank chief is convinced that inflation monsters are coming back to bite the economy and Greenspan appears set to pull the interest-rate trigger again.
Wall Street will be on pins and needles going into the next meeting of the Fed's interest rate-setting group on Dec. 21.
Experts say the worst thing that could happen for the market would be for consumer spending to speed up and for the
economy to continue to growth, despite three interest-rate increases since last June, which were aimed at putting the brakes on
the economy.
``That's the kind of stuff that could end a bull market,' said Manley. ``Right now I would characterize the scenario as only a
risk that I have worry about, but not one that would force me to protect myself against.'
So far, Greenspan has failed to talk the economy down, despite his contention that he has done the right thing at the right time
with the right amount of force to snuff out inflation.
The stock market also hasn't bought the Fed head's line because inflation is still incredibly low.
Allen Sinai, chief global economist for Primark Decision Economics Inc., said this summer's rate increases, totaling three
quarters of a percentage point, are at the ``edge' of what historically has been needed to get the job done.
But the Fed may have to revisit its game plan because things are different in this ``New Age Economy.' Productivity remains
high and inflation is still low after almost nine years of growth.
``The U.S. economy is extremely good at evading and avoiding the restraint of higher interest rates,' he said. ``The system
finds ways to minimize the cost of higher interest rates and to maintain the flows-of-funds from lenders to spenders and
borrowers.'
He said the Fed will also have a tougher job than ever before in fighting inflation.
``This time around, the number of financial intermediaries outside the Federal Reserve span of control is much greater than
previously,' Sinai said.
``Also, the rest-of-the-world economy is beyond the scope of the U.S. central bank, leaving open the possibility that a big
worldwide boom could contribute to higher U.S. inflation and prolong the time before tighter money could hold back the
economy and reduce inflation,' he said.
The Fed also has to be preoccupied with the fall-out overseas from its domestic policy.
The Pacific Rim countries and Japan are growing gray hairs, worried that if Greenspan is able to slow the U.S. economy, then
he could take down their economies, which are starting to get back on their feet after a recession.
``Higher interest rates by the U.S. Fed can also affect capital flows and can puncture the stock markets in Asia because higher
returns on U.S. investments such as Treasury bills makes it harder for the Asians to attract money,' said Paul D. McNelis,
professor of economics at Georgetown
Asia's biggest argument is that if Greenspan succeeds in capping this country's growth, he would cut American demand for its
goods.
The American consumers' appetite for foreign stuff has been so hot that it has driven the U.S. trade deficit to a record $25
billion this year, while helping to fuel Asia's rebound.
In particular, Japan is troubled by the rise in its currency, the yen, to a four-year high against the dollar. The yen has been on
the ascent since a burst of economic growth in the first quarter shored up an economy that had been in a downward spiral for
five quarters -- a record string of consecutive declines.
Now, there's concern the fast-rising yen could be a serious threat to the recovery of the world's second largest economy.
All of those things are on the table. Happy stock picking. (Questions or comments can be addressed to
Pierre.Belec(at)Reuters.Com). |
