Santa RallyDecember is also noteworthy for the “Santa Claus” rally that begins Christmas Eve and lasts through the second trading day of the new year. During this period, the average gain for the S&P 500 since 1969 is 1.5%. Perhaps more importantly, this period is the first indicator of what may be in store for 2015. According to Hirsch's analysis, the last four times the Santa Claus rally didn’t happen the following year was flat twice (1994 and 2004) and very poor twice (2000 and 2008). The roughly 38% drop in oil prices in recent months will benefit consumers and others such as airlines and cruise lines.
In my opinion, the drop is supply driven. That is, it doesn’t stem from a drop in demand, which is important for several reasons.
Oil PricesFirst, suppliers can (and eventually will) respond to the price drop by cutting production. Second, with long-term global demand still in place, at some point the pendulum will swing back again the other way, and the energy industry will be very profitable.
How long either of those takes is unknowable for now. It’s interesting to me that the futures’ price for oil in 2019 remains just below $90 per barrel, exactly where it was a year ago.Lower oil prices are deflationary and will likely help keep long-term interest rates lower for longer. Inflation? What inflation? The 10-year note in the U.S. is roughly 2.25%, and, while I’m not in the business of predicting interest rates, my guess would be that the 10-year will touch 2% before it touches 3%.
2015 outlookIn my opinion, next year has the ingredients for another good year, but there is no doubt that markets, broadly speaking, aren’t as attractively priced as they have been. I am concerned about the surprisingly rapid appreciation of the U.S. dollar, as a number of core holdings have global operations. In addition, sentiment has gotten exceptionally high again, as has happened several times in 2014, and is near levels that have coincided with short-term market tops in the past. This may not be an issue for the balance of 2014, as so many portfolio managers have underperformed and will be buying any dip. Nonetheless, 2-3% GDP growth, a strong currency, rock-bottom interest rates, abundant merger activity, lack of alternative investments, increasing bank lending, and falling oil prices are all favorable factors. At some point the Fed will move on short-term rates, but with the rest of the world struggling, my guess is that is further away than is generally believed. Besides, the S&P 500 peaks on average 29 months after the first Fed rate hike” according to my research.
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