Equity markets started the week carrying on the positive mood they ended the last. The latest Chinese inflation and import export data appeared to have little impact on equity market sentiment. Year on year inflation grew at 1.6%, in line with expectations and pretty much in line with many of the developed economies of the world.
There will be much hope amongst investors that we are starting the much-fabled run into Christmas, equity markets are supposed to enjoy. The "Santa Claus rally" as it is affectionately known, is according to Marketwatch research, a bit like St Christopher himself, something of a myth. In reality, again according to Marketwatch, stock market returns in the month of December have been no more than inline with the other months of the year. There does however seem to be evidence of a modest outperformance coming into the last few days of December?
So far this year according to Bloomberg US equities are up approximately 10%, with UK and European ones down approximately 4%. Value investing has underperformed growth investing and large cap stocks have outperformed small cap ones. That would reflect the slightly more conservative view of the strength of the global recovery this year, and possibly signs of a maturing bull market. Most asset classes are higher with the particular exception of energy and precious metals; the fall in precious metals mainly reflects the fall in the gold price. Gold has fallen nearly 40pct from the peak in both sterling and US dollar terms. One would imagine many of the gold bulls are close to capitulating.
The idea of the Santa Claus rally makes sense, apart from the idea that investors will look to the coming year with optimism. As well as the fact that most fund managers get paid on the year-end valuation it is logical not to rock the boat into the year-end.
Fund managers are often accused of window dressing into the year-end, the definition is of which to sell the losing stocks and buy the winners. The reason for window dressing is that fund managers want to be seen to be holding the stocks that have performed well over the year and lose the ones that have not. This can have the effect of pushing higher the outperforming sectors into the year-end and depressing the underperforming. Why they wait till the end of the year before dumping the losers is a bit of a mystery.