all of the time-worn axioms based on the calendar actually were worth following this year:
- The "January effect" (the market tends to rise in January attributed to individual investors putting money to work after taking tax losses in December) worked this year as the S&P 500 posted a 2.3% gain in January. The "January barometer" (stock gains in January often lead to a gain for the year) and the overlapping "first five days" indicator (stocks rising during the first five days of the year indicate a high probability for a gain for the year) have both proven accurate, so far.
- "Sell in May and go away" (suggests investors sell and avoid the summer months) worked with stocks peaking for the year on April 29.
- October, the "bear killer" month (stock market downturns famously end and reverse in the month of October), ended the 19% peak-to-trough stock market decline with stocks bottoming for the year on October 3.
- If this "year of the market axiom" pattern continues, what comes next? Perhaps a "Santa Claus rally" is in store for December. Markets must still move past the uncertainty of November that includes key policy events:
- Government transitions in Europe.
- Action by Congress to avoid a government shutdown.
- The Super Committee proposals to find $1.5 trillion in deficit reduction measures.
But then a year-end "Santa Claus rally" may cap off a volatile year of modest single-digit returns for stock market investors. What may be the trigger for the textbook year-end rise in the market known as a "Santa Claus rally?"
- A rebound in investor sentiment as Europe takes long overdue actions to avoid a financial crisis.
- Improvement in the job market as foreshadowed by the recent decline in initial jobless claims below the 400,000 level in recent weeks.
- The holiday shopping season surprises by exceeding retail sales estimates, as it did last year.This textbook pattern of calendar-driven performance by the stock market may mean that the best year-end strategy is to invest by the book.
Jeffrey Kleintop, CFA
Chief Market Strategist