Here comes Santa Claus right down Wall Street

I love the December-January period and not just because of ski season. Many strong market trends usually play out and I like to try and take advantage of those. With stocks falling over the past two weeks (until Wednesday), the bears are coming out of the woodwork with reasons why the aging bull market can now be left for dead. But as we saw in October, rumors of the bull market’s demise have been greatly exaggerated!
You already know that I have been a strong bull for the past few years and pounded the table to buy after each decline. As I keep saying, bull markets don’t die of old age; they die because of mistakes. This has been, is and continues to be, the most disavowed, hated bull market of my 26-year career. Eventually, yes, it will end and we will see a routine 12 to 18 month bear market that lops 25% to 40% off the major indexes. And yes, while I wrote that so cavalierly, the bear market will not be fun to live through, as it is much more difficult to make money during bear markets than bull markets.
(More: All-time highs in stocks, but time for a breather)
I have heard from folks that the bull market is over and the market looks just like it did in late 2007 and early 2000. I have heard from folks who think the market acts just like 1998 when Russia defaulted on its debt. I just don’t see any of those really negative periods being mirrored today. This market never had the warning signs of peak, as it did previously. Could this be a precedent setter? Sure, but investing that way is a ticket to the poorhouse over the long-term.
Today, stocks are in their strongest six-month period — in fact, stocks are in their strongest three-month period and stocks are about to enter their strongest short-term period. I love the old expression “If Santa Claus should fail to call, bears may come to Broad and Wall.” That means if we don’t see a year-end rally, it bodes poorly for the following year. It’s been a rough few weeks for the bulls, but I am not counting St. Nick out just yet.
In addition to the favorable calendar for stocks in general, this is also the time of year when small- and micro-cap stocks typically outperform their large-cap brethren. It’s been a very challenging year for the Russell 2000 index of small caps, but there is supposed to be at least a temporary respite from underperformance over the next month or so.
Yes, crosscurrents abound. In a bullish scenario, stocks are stretched about as far as they typically get at this time of year. With more than 80% of fund managers trailing their benchmark, if and when we see some stability, that should get some sideline cash into stocks at a time when significant sell-offs are not very likely.
Paul Schatz is president of Heritage Capital.