On November 12 on BNN's "the Close" with Michael Hainsworth, Michael asked me whether I thought there would be a Santa Claus rally. I suggested that I thought that Santa had come early and or it was more like a "Trick or Treat" rally (given that it appeared that the move from Aug.24th's lows to a peak on or about Nov. 3 had run its course).
What is a "Santa Claus" Rally?
It is loosely defined as a rally in the stock market in the weeks before Christmas and into the New Year. Traditionally, the Santa Claus rally has occurred between Dec.15 and Jan.6:
Since 1950, the S&P 500 index has gained an average of 2.13% during this year end stretch, and was profitable 80% of the time, according to the Stock Trader's Almanac.
The sector with the best performance over the last 25 years between Dec.15 and Jan.6 is materials. Significant gains have also been logged by energy, industrials and financials. Consumer staples has been the worst performing sector.
One of the biggest reasons for the rally is the burst of special dividends and increased share buybacks that are frequently announced before the end of the year. Additionally "window dressing" usually helps lift stocks in December. Mutual funds and money managers are inclined to polish their portfolios before the end of the year. They will buy winners and shed underperformers. This activity tends to drive volume and sends stocks higher.
On the Nov.12 BNN interview I also suggested that oil prices would likely move lower dragging the C$ close to $US.70 and that the Fed would raise rates by 1/4% at its Dec. 15 and 16 meetings. I am not normally one to make predictions, but felt it was only polite to answer Michael's questions, so I proffered my best educated guesses.
Had I known at the the time that history would have an 80% chance of proving me wrong, I might not have been so quick to offer up my opinion that there would be no "Santa Claus" rally.
However, the fundamentals, as we see them, just didn't make sense (as I have been fairly vocal about both on this blog and the weekly, Tuesday High Rock webinars) to drive equity prices higher.
With volatility at higher levels a 2% (average SC rally move) move in equity markets is certainly not out of the question. So technically, I may be proven wrong (especially in the short run).
Last week, on the day the Fed did raise rates, I was invited back to BNN's "The Close" to offer my opinion on what that might mean to financial markets and the global economy. On that day alone, the S&P 500 was up by 1.5%.
Since then the S&P 500 is lower by 3.2% (Fridays close).
So, as we have also suggested quite frequently, with diverging global monetary policies, volatility will likely continue to be the biggest issue for global financial markets.
Volatility creates uncertainty and reduces confidence.
When individuals and businesses are not confident, they postpone economic decisions and economic growth suffers.
How do we protect ourselves?
Balance, diversity and perhaps a little extra cash. Don't put new money to work in over-valued assets. Wait patiently for over-valued assets to return to more reasonable levels.
No need to chase or even hope for a "Santa Claus" rally, because in the long run (beyond Jan. 6), it won't much matter.
Re-balance regularly: sell out-performing, over-weight (in your portfolio) assets and buy under-performing, under-weight (in your portfolio) assets.
Most importantly: Enjoy the holiday season!
The US Fed raised rates by 1/4% today, that was no surprise.
"The Committee judges that there has been considerable improvement in labor market conditions this year and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2%. The stance of monetary policy remains accommodate after this increase, thereby supporting further improvement in labor market conditions and a return to 2% inflation."
"The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate."
However, the graph of committee members projections (otherwise known as the "dot plot") reveals something a little different:
right click on the graph and open image in new tab to enlarge
In a nutshell, it appears that the majority of "dots" in 2016 fall near 1.5%. That would indicate 4 more expected 1/4% rate increases.
Is that gradual?
It would suggest that expectations for US economic growth in 2016 would be rather robust.
The International Monetary Fund (IMF) forecast for US GDP growth in 2016 is 2.8%. Hardly robust.
Each time the Federal Reserve raises rates, they must drain liquidity from the markets. It has been that liquidity that has spurred equity market growth and has taken US equities into "nose bleed" territory. Well above what simple earnings metrics would consider average.
12 month forward price to earnings ratio = 16.1
10 year average = 14.2
As liquidity comes out of the system, equity prices will have to return to the average.
I really didn't know, so I went to "Google" (which sent me to "Investopedia")...
"Great money managers are like the rock stars of the financial world. While Warren Buffet is a household name to many, to stock geeks, Graham (Benjamin), Templeton (Sir John) and Lynch (Peter) lead to extended conversations on investment philosophies and performance. The greatest mutual fund managers produce long-term, market beating returns and helped many individual investors build significant nest eggs."
More here http://www.investopedia.com/articles/mutualfund/08/top-mutual-fund-managers.asp
Well, like many a "rockstar" the closest you might get to them is their memoirs (or maybe an autograph)!
If you are looking for portfolio performance in a mutual fund or from any portfolio manager for that matter, it is going to be tough sledding. Most portfolio managers cannot even match the benchmark index that they are judged against.
We have just come off of 6 pretty good growth years so even just plain old "good" portfolio management is not so difficult.
What may make the difference between good and a little better could be how she /he handles your portfolio in the more difficult years (and certainly 2015 has been a little more difficult).
But my friends, alas, as you may find, it is not just about performance (although nobody is going to be comfortable with negative returns in any given year).
It is about being looked after.
It is about communication.
It is about crafting a personal (or family) plan and developing a strategy that will take you to your goals.
It is about monitoring your plan and reviewing it on a regular basis.
It is about making adjustments to your strategy when necessary.
As the writer of the question put it:
"I don't buy the notion of a rock star reputation. Actually, I hate that. What I think is most important is the ability to get quality service and value, no matter if they are big or small".
I could not agree more.
Tuesday is webinar day for our clients at High Rock, where we will discuss the global economy, financial markets and other wealth management matters.
It is Fed Decision Day on Wednesday, so we will certainly have that on our list of topics for this week.
We will post the recorded version at
at or about 5pm.
(No Blog tomorrow, I am off to see my granddaughter's Christmas/Holiday school performance).
But tune in Wednesday for more on the US Fed decision!!
Yesterday, equity market volatility hit levels that we had not seen since back in late September , so I thought I might update the technical picture.
We have been suggesting that with diverging monetary policies (and the US federal reserve poised to raise rates on Wednesday), tightening credit markets (especially in the High Yield markets), slowing global economic growth and falling commodity prices (especially oil) that volatility could possibly turn higher. Add in some record options ($1.1B) expiring next Friday that may trigger further selling and you get quite the mix.
We have also suggested that higher levels of cash and cash equivalent assets in a portfolio would be a good defensive tactic given all the current uncertainty.
In the S&P 500, failure to see enough buying to push prices above the down-trend lines from May and July has traders testing buying support:
The most recent buying support at 2020 failed late in Friday's trading session. This may bring longer term sellers into the market (as they lose confidence) and depending on volume, there is not much previous chart support until 1870 which is about 7% lower.
The good news is that there are up-trend lines extending back to 2011 and 2009 that should bring bargain hunting to long-term buyers who still believe in an extended bull market:
The weekly charts show trend-line support just above 1900 (line from 2011 low) and below that at or about 1750 (line from 2009 low).
Despite the short-term volatility, until these longer-term trend lines start to fail, the bull market remains in tact (higher highs, higher lows). However, recent inability to make higher highs (indicating a "tired"market) does make the near-term situation vulnerable to tests of the recent August lows.
Technically, the secular bull market that has been in place since 2009 will still be in place as long as the 2007 high, just below 1600 holds. But that is a long way from where we are right now.
The Global Equity Market picture is not quite so positive:
The benchmark global index broke through its long-term up-trend line from 2009 back in August and is now, after failing to move above the down-trend line last week, looking like another leg lower is likely to ensue.
Because you might just get it (and then some)... in a nutshell, a big thank you to all of you who responded to my requests for feedback!! (keep it coming). I now have a good supply of topics to carry me through all of the rainy days when my own brain cannot drum up the good stuff!
Let's start with a tough (but excellent) one!
"What are your thoughts on socially responsible investing? I feel like everyone has their own definition or understanding and that means we cannot all agree on a simplified solution."
This may take more than one blog to get deeper into the issues, but lets start at a high level and work our way into the key components.
Best to get to what is the more universal definition and where better to turn than the Responsible Investment Association (RIA), Canada's membership association for Responsible Investment. Members include mutual fund companies, financial institutions, asset management firms, advisors, consultants, investment research firms, individual investors and others interested in Responsible Investment.
Members "believe that the integration of environmental, social and governance (ESG) factors into the selection and management of investments can provide superior risk adjusted returns and positive societal impact".
Lots more here:
Brief History: In the 1990's the corporate social responsibility (CSR) movement emerged and leading companies around the world began measuring their performance on a wide range of sustainability and socially responsible policies and practices.
By the beginning of the 21st century, many corporate leaders had acknowledged that companies that measured and managed ESG as well as financial factors were more profitable. That growing consensus became a driver of sustainability or corporate social responsibility reporting in many companies.
Our global benchmark index, from which we judge our portfolio performance for equity markets is the MSCI All Country World Index (ACWI). As it happens, MSCI also has an ACWI ESG Index. There are 1194 constituent companies in this index vs. 2480 in the ACWI index.
It is not within the scope of this blog to list all the companies in each, however if you peruse the top 10 holdings of each, you will be able to see a few of the companies that have been excluded (for example):
click on the table to enlarge.
Interestingly, the 5 year comparative performance has the ACWI ESG better by about .5% (annualized), with a lower risk level (standard deviation) of about .5%. Better risk-adjusted returns for the AWCI ESG.
Obviously it still begs the question as to whether we are in agreement with what is considered "Responsible", but lets use this as an introduction and debate the deeper stuff in a forthcoming blog.
If you would like to comment or provide feedback directly:
If you would like to receive this blog directly to your email:
As always, all correspondence is treated with the utmost of confidentiality!
And thanks in advance for sharing your thoughts and questions: very helpful!!
I have been writing this blog for close to a year now.
The original purpose was to try and give you, the reader, some sense of my / our thinking in terms of the global economy, financial markets and wealth management issues that I felt were worth discussing.
From time to time I get emails asking specific questions that help me direct my topic selection, which are very much appreciated, especially on the days where I sit at the keyboard fumbling for something pertinent to say.
There is always something to write about, but I try to offer up some alternatives to mainstream thinking. It is easy to parrot the headlines, but more often than not, if it is front page news, it is yesterday's news and I would rather be more forward thinking, if I can.
When it comes to financial markets, most everyone involved will be better off if they move higher (in price). The industry has a vested interest in optimism so most advisors are likely to talk positively about "opportunities".
It is why December is (historically) usually the best month for equity markets: most portfolio managers will be judged at year end as to how they performed, so in times of declining liquidity it is easier to move the market higher with a little late year buying. Hence the term "Santa Clause Rally".
Hopefully this blog helps to get behind the "myths" and helps bring a broader understanding of what truly matters in the longer term. What motivates short-term trading is more psychological and driven by less logical reasoning.
This is where I ask you for your help!
I would love to get your feedback. If there are any topics for discussion that you would like me to cover here, please feel free to let me know (and any other commentary that you may have: what you like and don't like).
There is no such thing as a stupid question!
(and of course, your confidentiality will always be completely respected).
On another note, if you would like to receive this blog directly into your email, please email
and she will add you to the list.
It has not been a banner year for investors with balanced and diversified portfolios.
At the moment, the World Equity Index is down about 1% this year, add the dividends that you should receive, an additional 3% or so and the diversified equity portion of your portfolio should have an approximate total return of around 2%. The bond index total return should be at or about 2.5%.
A balanced portfolio with a 60% equity, 40% fixed income mix should be providing a total return in the vicinity of 2.25%.
What did your advisor charge you to achieve that return?
and what hidden fees (if they used other managers, like mutual funds or others to help manage your money, those managers will charge an additional fee that you may want to ask about) were there?
If your advisor charges you 1.5% and the outside manager charges an additional 1%, then you are now in negative territory for the year.
It is only 1 year. The last 6 or so years have been above average in total returns and as I have been saying (over and over), we will have to have a year or 2 of below average returns to bring us back to the long term averages.
What are you paying for?
Do you have a tailored plan? One that is suited to your goals, risk tolerance and time horizon? Is it flexible enough to accommodate the changes that may come along in your life?
Is your plan (at High Rock we call it a "Wealth Forecast") being monitored regularly to make the appropriate adjustments when it becomes necessary (this should happen at least twice per year).
When you add new money to your portfolio, does your advisor just throw it into the mix (the easy thing to do for the advisor)?
Do they earn their fees by analyzing the current state of the economy and financial markets in order to make the appropriate decisions as to when it is best to put the new money to work?
In a year like 2015 with all its turmoil, a tactical approach that helped to protect capital was prudent.
Given that we are to expect even more volatility in 2016 (at least in the early going), it may continue to be prudent.
With slow economic growth, low interest rates, declining earnings growth, tighter credit conditions it may be worth asking this one:
What is the strategy for the low return environment that we are in?
Let me know if you are not satisfied with any of the answers that you get.
It is a busy time of year as we put the final touches on 2015 and get ready for 2016. It is also a social time and a family time, depending on how you choose to celebrate.
For those of us who have most of what we need it can also be a time to think about those who don't.
A few years back I was invited to a party that was thrown at the Raymond James office where my business partner at the time and I parked our wealth management practice.
They called it the "Fishbowl Holiday Angels" party (because this particular group in the organization parked themselves in an all glass office space, where passersby could see all that they got themselves up to!)
But the premise of the party was to not only share some holiday "spirits", but to also drop a donation into their collection to the Holiday Angels Program, which would sponsor a family (or number of families) that were in need of some fairly basic items that those of us in better circumstances might take for granted.
I liked this idea, mostly because, as I discovered, all the donations (of food, clothes, etc.) went directly to the families in need.
The organization who sponsor's the Holiday Angels Program, New Circles: http://newcircles.ca/about-us/ would identify and select various families in need and match them with a donor family (and extended family in our case).
Not thinking much more about it, other than the good feeling of helping out, I received an email from Sandra and Phil Kwon (who spearheaded the "Fishbowl" effort) on or about December 23 of that year that contained thank-you letters filled with so much gratitude that I was reduced to tears.
These families, parents and children were overwhelmed by the generosity of strangers and that was one of their first impressions of the people of Canada.
It just completely made my Christmas (which is what we celebrate in my family, although we are not necessarily religious folks, but there is lots to be said for keeping certain traditions). It was just a simple act of kindness that was so incredibly well appreciated.
Simple acts of kindness and the generosity of the human spirit.
That is what I love about this time of year.
So thanks to Sandra and Phil and the "Fishbowl" for introducing me to New Circles and the Holiday Angels Program. Each and every year we just want to give more because it is such a great feeling to be able to participate.
High Rock is a contributor to New Circles and we encourage those who are willing and capable to give, to assist those who are less fortunate.
(New Circles has no government nor United Way funding. They rely on the generosity of individuals, foundations and corporations to keep them going. They are partnering with Lifeline Syria and they will be the “go to” agency for Syrian refugees (who settle in Toronto) for clothing.
How annoying is this guy?
I can't believe how many times I have seen this ad and I record almost everything I watch on TV (to avoid the commercials)!
Almost as annoying as trying to argue, logically, about what might be particularly unsettling about equity markets that seem to find buying support despite all the warning signs.
However, as the great economist John Maynard Keynes once said: "markets can remain illogical far longer than you and I can remain solvent".
We have regularly referred to some very telling indicators on our weekly webinar that do point to some rather concerning issues that are taking place "behind the scenes" but it is comforting when the important financial journals pick up on some of these.
We have talked about how bond markets lead other financial markets (mostly because they are larger and far more multi-dimensional than equity markets).
One of our indicators comes from what is occurring in the High Yield Bond market: that historically, High Yield Bonds lead equity markets. The Wall Street Journal pointed to this in an article this morning:
High Yield turned lower at the beginning of the year, Equity markets played catch up in August and at the time moved a little too far, but have since popped higher, further widening the divergence on Friday (equity markets got quite happy with the US employment data).
A closer look at High Yield reveals that also, when defaults rise, it presages economic slowing:
US Employment data released this morning will not deter the US Federal Reserve from raising rates when it meets on Dec. 15 and 16 (in fact, it will likely raise the probability to above 80%).
When the Fed does raise rates, even by just 1/4%, in order to move market overnight lending rates higher (the market where banks lend to each other), they will likely have to drain liquidity from the system.
I read this morning that it could possibly be as much as $800B, basically the amount of liquidity that was added in the 2nd round of quantitative easing.
What does this mean?
It means that financial institutions (that deal with the Fed) will have to raise money by selling assets (stocks and bonds, etc.) into the market, adding supply.
This will come at a time when seasonal (year-end) factors tend to drain liquidity as well, so there may not be enough liquidity to handle the selling.
With limited liquidity, volatility may escalate further as this selling occurs.
Presumably the Fed will be taking this into consideration and will try to accommodate the system, however at some point, regardless, the market will have to absorb more supply from the asset sales.
If there is not enough buying to absorb the supply, it could quite possibly push both stock and bond prices lower to test buying support levels.
The down moves over the last couple of days in the S&P 500 highlighted a failure to break higher to test the May highs and the up-trend line from September was broken to the downside, followed by higher volume selling. The market will look to test buying support, which should happen at or about 2020, close to the November lows. If there is not enough buying support there, then the next level to test will be the August lows near 1870-1880.
If buying support returns to the market, the challenge is the now well-established down-trend line from the May and July highs which has continues to inspire selling.
The trend is established by lower highs (which we continue to see) and lower lows, which have not yet been tested. Until the trend becomes more established, we can classify the market as trading "sideways".
However, this does lower the odds for those who may have been hoping for the traditionally strong December market, often referred to as the "Santa Clause" rally.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist