Some of you may be wondering why we have not pontificated on all the market movement of late. But the more things change, the more they stay the same: Since we last communicated, markets rallied strongly and are once again retreating.
The latest market rally was sparked by better-than-expected economic news and the appearance of progress in Europe. It is the same story we have been talking about all year: The economic data is not changing, but the expectations continue to jump wildly. The predictions had grown dire, and then holiday shopping turned out to be okay. Retailers did better than expected after Thanksgiving, and seasonal hiring has temporarily lifted unemployment. This week more retail numbers have come out showing roughly 2 percent growth, in line with all the data we have been seeing, but this time expectations have grown and now the same numbers are a disappointment.
In the meantime, the Federal Reserve came to the rescue in Europe, making it easier for European banks to borrow U.S. dollars. Shortly thereafter the leaders in Europe had yet another emergency meeting and this time came out with a signed document. This document appears to be every bit as valid as the signed document Lucy gave Charlie Brown assuring him that she would let him kick the football, right before she pulled it away at the last minute, causing him to fall flat on his back.
In case you have not seen the agreement, it is seven pages long, mostly due to the intentionally left-blank spaces throughout. It contains great proclamations like, “We commit to establishing a new fiscal rule.” It then lists elements that should be in the rule, but no rule itself. It proclaims that existing rules will be reinforced. In other words, this grand agreement is little more than an agreement to make a future agreement, to which at least one EU country, The United Kingdom, has said thank you, but no thank you. This week the market has seemingly seen through the empty words and we are once again on the downward path.
There is one force that could help us this time around and possibly keep a rally going, if only temporarily. The New York Stock Exchange still refers to the traditional winter solstice celebration as Christmas and not its new, more politically correct name, Holiday. I don’t think it is because Wall Street is full of Christian piety; I think it has more to do with superstition and the mythical “Santa Claus rally.” You see, the big guy in the red suit does more than deliver goodies to nice boys and girls around the world. Every year about this time he lifts the spirits of investors, and we seem to get a little rally. The Santa Claus rally is not guaranteed; there have been years when Santa brought us a lump of coal, and that is a possibility. But in the spirit of the season, let’s hold out hope.
We have a tough road ahead of us in 2012. Europe will be in recession if they are not already, and if it gets bad over there, it will spill over to us. So let’s pull for Santa. It may be temporary and meaningless in the long run, but in the short run Santa rallies are fun, and we’ve all been good this year.
Chuck Osborne, CFA
Managing Director
