Will Santa Bring a Market Rally?

Every Christmas season I am asked if I believe we will have the traditional “Santa Claus Rally.” The stock market often rallies between Christmas and New Year’s Day, though I believe some people get a little overly excited about it. Of course next month they will ask about the “January effect,” then the “Spring bump,” the “Summer Doldrums” and on it goes. Traders who follow various almanacs are able to point to countless market trends for every season or event throughout the year. I like to say that trends are only trends until they aren’t. And when they aren’t it can get really ugly for those who invest based on them. Just ask someone who bet the farm after an NFC team (New York Giants) won the 2008 Super Bowl. That was supposed to indicate a great year, but we all know how well that turned out.

These questions often lead me back to a friend of mine who manages several billion dollars for one of the world’s largest money managers. Most investors measure the daily movements in their accounts in hundred dollar bills, but this man watches his accounts move enough each day to buy or sell several Las Vegas Strip hotels. I asked him how he dealt with the stress of all that responsibility. His answer was simple. “I don’t care where the price of a stock is going tomorrow. I only care where that company is going to be in five years.” My friend makes decisions every day that affect the life savings of thousands of people. His long-term view reduces stress in his job while providing a great benefit to his clients, especially now when things like short term pricing issues in the oil markets are causing so much grief around the world. He recognizes this is a temporary problem that will likely have little effect beyond a few months.

Unless you plan on being a day trader, it doesn’t make any difference what happens between Christmas and New Year’s Day. As my friend understands, where the stock market is going tomorrow has no bearing on whether or not you will be able to enjoy your retirement over the next several decades. Making investing decisions based on short term trends is about as smart as buying a home in Anaheim because you are planning a trip to Disneyland.

During the time of year when people are thinking of setting goals, take a look at your financial compass and make sure it is focused far off on a goal that is unmoved by the waves of the day. This is especially true in a day when weekly swings in the Dow Jones Index of nearly 1000 points are becoming very common. By keeping your eye focused on a distant goal you can truly enjoy the “Santa Claus Rally,” which should be to rally around those things in life that really matter during this special time of year. Merry Christmas.