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The Christmas That Santa Claus Forgot

santa rally

: Tell me, does anything strike you as odd about the last three weeks or so? Did the Christmas decorations go up a little bit later than usual in your town? Are the supermarkets just a little keener than usual to shift their seasonal booze at buy-it-now prices? Are you toning down the prezzie list, just a teensy bit?


Did you spend less on Christmas cards? Did you turn on the radio for the Autumn Statement in the hope of a nice little vote-winning giveaway but find nothing in the Chancellor's larder? (Unless, of course, you count not having the hassle of getting a tax disc, or not having to pay more than 2% above inflation for your train tickets?)


No, surely there’s something else that we haven’t seen this year? Yep, you've got it. The Santa Claus rally, which should have kicked into action about ten days ago, has been conspicuous by its absence. Whatever it takes to get the fund managers panting for more as the bonus season approaches, it’s in short supply. And can you honestly blame them?


The Gory Details
Let’s put some numbers on that. The Footsie has shed 3.5% since early November and is now back to the levels of early July. The Eurofirst has lost all the gains it made in October and is now back to mid-September levels, which wouldn’t sound so bad if the euro hadn’t also lost 3.5% since August.


You might, of course, object that the S&P 500 has put on 2.5% since the start of November, but that’s been pretty much obliterated by the fall in the dollar/sterling exchange rate which has moved by 2.3% over the same period. Yes, the Americans might be making a little bit of whoopee, but for a Brit the advantages of being in US stocks have been pretty negligible, and they’re not getting any better.


Even the Nikkei 225’s much-vaunted surge has all but stopped, with a 4.3% improvement since the summer being utterly wiped out by a 14% deterioration in the yen/sterling rate – and a 7% drop against the dollar. That’s not so relevant to Japan’s own situation, of course, because the overwhelming majority of Tokyo investors are Japanese, not foreigners. But you get my point.


The Elephant in the Room
Nor should we have very much trouble finding the explanation. America is about six weeks away from having to renegotiate the debt and deficit issue that was hurriedly patched in October – the three month extension is due to run out on 15th January. And when that happens, the politicians will once again find themselves staving off the possibility of a debt default, however improbable that might seem.


The S&P 500 is trading on a cyclically adjusted price/earnings ratio of about 25, a long way north of its long-term average. And although the CAPE measure has been getting a lot of stick recently for being supposedly irrelevant at a time of steady recovery, it has a chillingly good record of predicting downturns over the last 20 years or so.


Oil prices are still trying to work out whether to be cheered by China or alarmed by shale oil and gas. The QE taper looks set to frighten the US equity scene in the new year. And let’s remember, please, that QE has never been tried before and that nobody has any firm idea of exactly how it has worked so far.
Small wonder that the markets are hesitating. It’s the sanest thing they can do. But will sanity win the day?

 

Over To You, Chico     

Who knows? I don’t, and I very much doubt that you do. Santa still has about three weeks to run before the traditional seasonal surge is due to end in early-January. But as the immortal Chico Marx put it, in his own inimitable mock-Italian accent:
“Everybody knows there ain’t no Sanity Clause”
 

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