'Tis The Season To Be Jolly

12/26/2016


More than Christmas spirit is in the air.

Stocks are up, consumers are confident, and President-elect Trump is pitching his plans to boost economic growth. Whether you credit the Trump effect, decent corporate-profit prospects, the Fed's long-awaited interest-rate hike, or projections for a strong holiday-shopping season, stocks are climbing.

In an effort to figure out what's going on this holiday season, I invite you to take a quick three-question test. Think of it as preparation for the New Year. Take a moment to come up with answers before you read on.

Here are the questions.

1) Is the Santa Claus rally real?

2) Do the professionals believe?

3) Has all this post-election talk of stronger economic growth actually changed how economists think?

The answers

1) Yes, there is a Santa Claus.

Over the last 38 years, the S&P 500 Index has averaged a two-month gain of 3.1% for November and December, more than double the average return of 1.4% for all other two-month stretches. Stocks have gained in 74% of the November-December periods, versus 64% for all other two-month periods. This year, the index rose 4.0% during the first 10 months of the year, then gained another 3.0% from the end of October through Dec. 21.

2) Apparently editors of investment newsletters do believe in Santa. At least a little bit.

According to 28 years of data from Investors Intelligence, bullishness among newsletter editors has averaged 48.5% in November and December, versus 45.7% in the other 10 months. Not exactly a grab-you-by-the-hair trend, but we looked at more than 1,400 weekly data points, and the increased end-of-year bullishness is real.

In fact, given the answer to Question 1, higher bullishness makes sense. Even professionals tend to feel encouraged when stocks are going up. Oddly enough, the percentage of bearish advisers is nearly flat, with the holiday season average at 29.5%, versus 30.0% for the rest of the year.

3) Economic-growth estimates are rising, but there are other possible explanations for the increase in optimism, beyond post-election exhilaration.

The Blue Chip Economic Indicators consensus for gross domestic product rose in December, projecting an increase of 1.6% this year, up from 1.5% in November. While this increase in the growth target isn't large, it represents only the second month in which the 2016 estimate has risen since Blue Chip first released a target of 2.9%, back in January 2015.

The U.S. economy expanded at an annualized rate of 3.2% in the third quarter, its strongest growth since the third quarter of 2014. While the Trump factor may have played a role in the estimate increase, actual third-quarter GDP numbers were also revised upward in November from the preliminary October reading. Blue Chip targets 2.3% growth in 2017, up from 2.2% in November and the most optimistic target since June.


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