With weekly headlines of the financial markets plunging one day and soaring the next, followed by a mixed bag of economic news, it comes as no surprise that investors are getting frustrated as they keep watching their money slip away.
But this may not be the right time to throw in the towel.
After all, that jolly old fellow decked in red almost always comes through for investors at this time of the year, regardless of whether you've been naughty or nice. Although nothing's certain in investing -- as many have learned the hard way in the past few years -- market watchers believe Santa Claus will slide down the chimney again this year, giving a nice little boost to the markets and making more than a few wishes come true.
"I think there may be a pop at the end of the year," said Michael Manford, chief market strategist at Canaccord Capital Corp. "We may have a minor rally."
The stock markets have already shown encouraging signs, with the S&P/TSX composite index up 15.5 per cent and the broad Standard & Poor's 500-stock index up 17.4 per cent from their early-October lows. But in the first few days of December, North American markets have struggled.
Some may argue Santa spread his holiday cheer a little earlier than usual, in the form of the rally in late October and November. But market watchers remain optimistic, saying the markets should still move higher through December.
December rallies are so common and reliable that the investment community long ago labelled the phenomenon the Santa Claus rally. Strictly speaking, it traditionally takes place in the U.S. stock market during the last four or five days of the old year and the first two trading days of January. Analysts say this period represents a bounce-back from the lows of September and October.
But the month of December has also been great for the major indexes, including the S&P/TSX composite index. Broadly speaking, said Garry Cooper, an analyst at UBS Warburg Inc., "December's performance has also been extraordinarily consistent; the month has provided positive returns in 40 of the past 46 years [for the S&P/TSX composite]."
The numbers are even more compelling looking at a more recent time frame. Since 1988, the month has continued to post the highest average returns of any month of the year, at 3.1 per cent. (In second place is May, with a comparatively modest average return of 2 per cent.) December returns have been positive in 13 of the past 14 years, even though the S&P/TSX composite produced a negative return for the year as a whole in five of those years, Mr. Cooper said.
At this point, investors may be scratching their heads, wondering where they can load up on these big opportunities to fill their stockings. After all, they've watched their investments dwindle in almost every sector over the past year as the markets suffered setbacks from weak earnings, a possible U.S.-led attack against Iraq and countless corporate scandals.
But Mr. Cooper said there are chances to make some money if you take a peek at historical sector-by-sector returns for December. The information technology sector on the Toronto Stock Exchange has led the pack. Since 1988, its average gain in December has been 4.7 per cent. The telecommunications services sector also tends to do very well in the month, with an average return of 4.2 per cent. Health care, materials and financial issues also produced average returns of 3.4 per cent, 3.2 per cent and 3.1 per cent, respectively.
Bill Onslow, a portfolio manager at Altamira Investment Services Inc., sat down with his team this past week to see how they could position their portfolios as the year draws to a close. "Seasonal trends are definitely in favour of higher stock prices through to year-end," Mr. Onslow said. "It's a good time of the year, historically."
Currently, the momentum lies in the technology sector, the fund manager said. Stocks such as Nortel Networks Corp. have had a nice runup in the past month or so. However, Mr. Onslow has trimmed back a bit on technology in his portfolio, saying the fundamentals haven't really improved in the sector. It still suffers from surplus capacity.
While Mr. Onslow believes tech companies will do better next year, he said the stocks are already rising in anticipation of that.
With the recent rally in the overall market, he cautions that stocks have gone from looking cheap to being fairly valued.
But James Paulsen, chief investment officer at Wells Capital Management in Minneapolis, said a Santa Claus rally wouldn't be successful if technology wasn't along for the ride. He advises investors to buy well-known companies during this holiday season, especially because many are ridding themselves of excesses and there has been a complete revaluation of the technology industry.
"Play the ones that have been there and you know will be there," Mr. Paulsen said matter-of-factly.
Another sector that Mr. Paulsen favours is the industrials, which have been beat up heavily in the past little while. As the U.S. dollar rose, it forced manufacturers to scale back in order to remain competitive with overseas manufacturers, he said. Now, as the dollar falls, he said companies in the sector are increasing their pricing flexibility.
He also likes the financial sector, saying that the investment banking segment is starting to look better as the market turns the corner.
Mr. Manford at Canaccord Capital also advises investors to put money in the financial sector. Although he cautions that investors need to look at management and be aware of those hefty loan-loss provisions, he said the fundamentals are slowly starting to improve.
Finally, the consumer sector, which includes retail stocks, should do well during this holiday season, Mr. Manford said. "The employment growth we've had is awe-inspiring," he said. The Canadian economy continues to defy expectations with Statistics Canada reporting yesterday that 42,300 full-time jobs were created in November and the unemployment rate slid to 7.5 per cent from 7.6 per cent in October -- which bodes well for consumers continuing to have money to spend. Mr. Manford believes this should give a nice boost to retail stocks.
Looking beyond a Santa Claus rally, many market watchers say the stock market is likely building a base now, and will start to show signs of improvement next year as corporate profits return.
"Investors are probably thinking, 'I rode this sucker down and I would hate to miss it when it goes up,' " Mr. Paulsen said.
Seasonal cheer
S&P/TSX composite index
Average Monthly Return from January 1988 to December 2001.
Jan. 1.3
Feb. 0.7
Mar. 1.0
Apr. 0.9
May 2.0
Jun. 0.5
Jul. 1.2
Aug. -1.2
Sep. -1.3
Oct. 1.6
Nov. 0.4
Dec. 3.1%
Top performers
Average December return by sector, 1988 to 2001
Information technology: 4.7%
Telecommunications service: 4.2%
Health care: 3.4%
Materials: 3.2%
Financials: 3.1%
SOURCE: UBS WARBURG INC.
© The Globe and Mail
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