December, historically the best month to own equities, has begun with a whimper with the S&P 500 closing at a loss each of the first four days of the month. If you include the last trading day of November, that makes five days in a row of red-filled screens for a total loss of 1.23% for the S&P 500. In the grand scheme of things that is a pretty small loss but it already has pundits dismissing the chances of a “Santa Claus Rally” and others saying the recent new market high of 1807.23 for the S&P 500 reached on November 27 might be its last. We are pretty confident the latter is not the case and would also question the former despite a very slow start for equities in December; but to be clear, we are more interested in where the market can go in 2014 than what it will do in December of 2013.
As mentioned above, December is historically the best month to own stocks with them posting a positive return 76% of the time with an average price appreciation of 1.64% (based on 54 years of data). However, this does not imply the returns will happen in uniform fashion or not come without a few bumps in the road. As an example, last year the S&P 500 posted a price return of 0.71% for the month of December but lost 3.07% in a 10-day span (12/18 – 12/28/2012). In addition, though seasonality needs to be considered, you also should look at other factors. For example, the recent sell-off appears to be highly correlated with a slew of economic indicators (ISM Manufacturing, vehicle sales, GDP, employment, etc.) coming in better than expected that has the market concerned the Fed taper timetable has moved up again. In our opinion, when the taper does occur it will most likely cause a bigger sell-off than the current 1.23% move. However, we believe the long-term strength of the U.S. economy, even with a less stimulative Fed, will move the U.S. equity markets to even higher highs in 2014, even if that doesn’t occur this December.
Since hitting an all-time high of 1569.19 on 3/28/2013 the S&P 500 has moved on to make 37 more record highs, with the most recent occurring on 11/27/2013. Though these are receiving less fanfare than the first, they are still drawing investor and media attention but most likely still keeping some investors on the sidelines. As we have stated many times before, our research tells us we should expect a 3%+ pullback about every 90 days, and right on cue 2013 has included four of these (though the jury is still out) with the worst coming in at just a 5.76% pullback. We believe there is a good chance that 2014 may bring a steeper pullback than that when the taper becomes reality, but we believe it will not spell the end of this current bull market. We believe an accelerating U.S. economy driven by – to name a few – improvements in housing, vehicles and domestic energy production will continue to drive corporate profits which should translate to further gains for equities (though most likely more humble gains than in 2013) in 2014.
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information.
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