While December has only just begun, it has so far lived up to its reputation as one of the best months for the major averages. But analysts aren't convinced the early Santa Claus rally will continue in the week ahead.
According to the Stock Trader's Almanac, December has been the second-best month of the year since 1950, with an average gain of 1.6% for the S&P 500 and 1.7% for the Dow. Traders and portfolio managers often buy in December ahead of an expected bounce in January when Christmas bonuses are put to work and investors contribute to 401(k) plans and other retirement accounts.
Since the start of December, the Dow has climbed 1.6% while the S&P is up 1.4%. Still, Michael Metz, chief investment strategist at Oppenheimer, thinks the rally is over for the next several months.
"I think next week is going to be characterized by increased concern about the job figures," he said.Metz also believes that fears about the declining dollar are likely to escalate. The dollar declined to new lows against the euro on Friday, even though Madrid was hit with five explosions by Basque separatists. Tom McManus, chief market analyst at Banc of America, has concerns about the market for a different reason. "Wherever one looks, risk premia appear to be lower than average," he said. "This indicates that investors are chasing returns and overlooking risks." He noted that economically sensitive stocks have outperformed more defensive plays, low-quality stocks have outperformed high-quality stocks, and junk bonds have beaten solid corporate issues and "left Treasuries in the dust." In addition, he said, implied volatility in the market has fallen, particularly for high-beta stocks. McManus recommends a 55% weighting in stocks, 10% weighting in Treasury Inflation Protected Securities, 10% weighting in conventional bonds and 25% in cash.