Don't bank on a Santa Claus rally this year - but don't exit your investments just yet

by , 13 December 2018
Don't bank on a Santa Claus rally this year - but don't exit your investments just yet
History shows that stocks go up around 75% of the time during December.

What's more - the gains they post are typically bigger than for other months as well.

The MSCI All Country World Index, which measures equity returns from 23 developed and 24 emerging markets, has declined just six times in December over the past three decades.

That's gotten many investors and fund managers hopeful for a ‘Santa Claus' rally this December.


But I wouldn’t get my hopes up just yet… Don’t get me wrong – I’m not bearish on the stock market.

In fact, with a worse than expected December I believe prudent investors have a great opportunity right now to invest for great returns in 2019!

 

 

Why the Santa Claus rally won’t happen this year
 

Right now, there are three factors working against the possibility of a Santa Claus rally this December…

Factor #1 – Trump’s trade policy could upset world growth


Trump’s trade policy is turning out to be a massive threat to world trade and economic prosperity.

Trade tariffs are never a good idea as they artificially destroy competitiveness and free markets.

With Trumps policies the market pricing of things like maize, wheat, soybeans and metals are in flux.

This will affect developing economies like ours.

But it could also lead to lower production in the US itself.

Precisely the opposite of what Trump hopes for.

Sure, Trump and the Chinese president have called a ‘truce’ to better negotiate trade policy in the hopes of stopping the
 trade war between the two countries.

But the uncertainty, and trade tariffs already in place are taking their toll on economies and stock markets worldwide.

Until the madness ends - markets will struggle.

And I expect negotiations will take longer than just this December…

Factor #2 – Rising interest rates have got investors spooked

The SA Reserve Bank increased interest rates at its last meeting. Interest rates in the US are also in an uptrend.

This means investment funds and retirees are typically considering fixed interest investments as opposed to shares.

A micro lender and bank in SA for instance is offering investors an 11.50% yield on their money right now. So investors are asking why invest in the risky stock market when you can get a relatively safe 11.50% interest on your cash right now?

While this logic is definitely sound, I don’t expect the rising interest rate cycle to be nearly as strong as many now think it will be.

Dropping oil prices will slow down inflation worldwide. And this will dampen rising interest rates very soon.

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Factor #3 – Worries about global growth are hurting investor sentiment

According to a Merrill Lynch survey, fears about a slowdown in global growth are at their highest in nearly a decade.

The Bank of America states that ‘Investors are holding onto more cash’.

The two biggest factors driving these fears however is the ‘trade wars’ and a slowdown of growth in Chinese manufacturing.

 

These growth fears will resolve themselves in time – but not before year end.


All three of these factors holding back the stock market will resolve themselves in time.

I expect the
 trump trade wars to reach an end and for sanity to prevail. This will see an increase in growth for Chinese manufacturing.

And oil prices will remain lower for longer as well. That will curb inflation and keep interest rates low.

As this happens – there will be more interest in stock markets again, and less in fixed interest investments…

Lastly, South Africa’s political tensions will still put a hamper on
things till the ‘Expropriation without compensation’ matter is resolved.

This won’t happen by year end. But it will be resolved in 2019.


This sets our stock market up for a positive 2019


Shares, especially on the JSE, are very cheap right now.

Many companies are at record high profits with record low
valuations.

More than 300 shares on the JSE (out of +-450) are
 negative for
the year.
 Many of these still grew profits and paid dividends…

And these are the kind of shares you want to hold right now.

You want to buy these shares, ready for a rally in 2019.

Sure, the Santa rally isn’t happing by year end, but 2019 will be different…

 


 


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Don't bank on a Santa Claus rally this year - but don't exit your investments just yet
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