The famed Santa Claus rally was a term coined back in the 1970s when stock analysts began noting a seasonality trend which coincided with holiday shopping and increased consumer spending. Considering it takes years for a trend to develop, this makes perfect sense as it coincides with the Baby Boomer era entering their high earning years doling out gifts to their children as well as enhancing their homes in sprawling suburbs throughout the country. Of course, this was a day and age when the greatest concern was that of shooting your eye out with a Red Ryder BB gun.
While I actually believe it is not too late for Santa to appear, markets are grappling with the latest variant of Covid in addition to uncertainty surrounding the real market Santa, the Federal Reserve. Uncertainty breeds indecision and indecision often leads to knee jerk selling and irrational behavior. This is precisely what seems to be happening in the markets as we conclude 2021.
The question however is if this is, in fact, the end of the great Bull Market that began during the depths of 2009. For those who remember, March 2009 saw the Dow reach a low of 6,469.95, at which point our Federal Reserve stepped in to support the banking system and spark a liquidity driven rally the likes of which had never been seen before. Over a decade later, this discussion has shifted to one of fiscal responsibility rather than liquidity, which at this moment, the markets do not like one bit.
It is clear that market participants are struggling with the idea of another economic shutdown combined with a less accommodating Fed. It seems as if their natural inclination is to sell stocks. While this is an unfortunate way to end the year, I am pleased that it may finally produce opportunities we have been waiting for since the previous panic lows were established in March of 2020. The difficulty of course is sitting and waiting for the dust to settle.
Over the years it seems participants have become spoiled to the idea that markets go up daily, regardless of the environment and that when significant issues present themselves, we have a Fed willing to provide the backstop needed to get us back on track.
I prefer to be a bit more realistic and precisely why my focus of late has been steadfast regarding appropriate allocations and an educated understanding of risk. While it is never fun to sit through a correction, what’s of critical importance is to understand that corrections are part of the process when it comes to successful long-term investing.
As I review our allocation, I’m very pleased with our diversification with an emphasis on index exposure and passive investments. Furthermore, I feel good that over the last 18 months our discussion has centered around appropriate allocations and planning such that any short-term equity gyrations are met with strategic thought rather than knee jerk reactions.
From my vantage point, not much in the market has changed. We currently have a growing global economy that is rebounding after shutting down for nearly a year due to the initial strain of Covid. There are going to be bumps along the way as various countries respond differently to various challenges. Despite a Fed tone that is changing, we continue to have historically low interest rates and a very favorable tax environment. We are still awash in liquidity that needs to find a home and equity valuations that are coming back in from the stratosphere to more reasonable levels. At this point, I’m viewing this pullback as more of an opportunity than a warning and will be looking for opportunities should the weakness continue.
While I much prefer to write to you when the environment is full of holiday cheer, I truly hope you do not let the challenges of today significantly impact your holiday festivities. If you live in this great country of ours, we’re still blessed beyond measure and the challenges we face have always made us stronger. Despite the recent bump, 2021 will go down as a solid year and I’m very much looking for to 2022. May you and your family have a wonderful holiday season and happy new year.