The Rally Won’t Last Forever, Even If Santa’s in Town

Source: http://www.flickr.com/photos/teegardin/

Source: http://www.flickr.com/photos/teegardin/

What the market will do in the new year is always a favorite topic for speculation come Christmas time. The rally in U.S. equities in 2013 has been nothing short of amazing, and investors are looking forward to another strong, if not quite as spectacular, year in 2014.

Minus a monetary, fiscal, or psychological shock, history suggests that 2014 will be a year of modest gains. Estimates vary, but historical data compiled by LPL Financial Research indicate that the S&P 500 index averages gains between 6.5 and 12 percent following years in which it climbs between 20 and 30 percent. (For the record, the S&P 500 is up about 25 percent this year through Christmas.)

In the short term, though, investors can expect a little bit of volatility. For one, investors are braced for a little upside potential with the Santa Claus rally. First described by Yale Hirsch, creator of the Stock Trader’s Almanac, in 1972, the Santa Claus rally occurs during the last five trading days of the year and the first two trading days of the new year. Since 1950, the S&P 500 has averaged a gain of 1.5 percent during this period. Since 1896, the Dow Jones Industrial Average has climbed an average of 1.7 percent during this seven-day trading period, climbing 77 percent of the time.

Following this, though, the expectation is for some selling pressure in January and February. Speaking with MarketWatch, Dan Zanger of ChartPattern.com said that after the strong rally in 2013, he expects investors and traders to take profits in early 2014. This will shelter them from any possible correction, and allow them to defer paying taxes on the gains until 2015.

As far as any possible correction is concerned, the historical data suggest that stocks may be in for a dip. Zanger pointed out that every time a new chairman takes office at U.S. Federal Reserve, equities have corrected an average of 16 percent. Although the data say what the data say, it is somewhat difficult to imagine that incoming Fed Chair Janet Yellen could be the catalyst for the market correction that so many nervous market watchers are expecting. Ben Bernanke did a good job introducing financial markets to the taper, and far from throwing a tantrum equities have climbed consistently since the announcement, and interest rates have only climbed slightly.

Whatever the case, market watchers aren’t looking for a repeat of 2013. With the taper in place, investors are expected to take profits early in the year, driving the market lower. Prices are expected to recover — as they usually do — but at a slower pace.

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