Commentary

In December of 2007 we published a commentary entitled Surfing with Sharks where we highlighted several indications the markets may be headed for trouble. It had been five years since the tech bubble burst and memories of the devastating 2000-2002 bear market were all but gone. Emboldened by low interest rates and government stimulus programs, risk was back in vogue as bond investors chased record low yields and equity investors were piling into emerging markets.

Much is made every year about the “Santa Claus Rally”, the idea that stocks often rally around Christmas and into the end of the year. Is it just a seasonal headline grabber for financial media, or is there really a “Santa Claus” effect on the markets?

While the gap higher in equity markets has been exciting, the current pace of the S&P rally year-to-date is unsustainable without a pause, if not a short term correction. The S&P 500 Index tracking ETF:SPY has advanced +6.2% through 2/1/2013.

The path of market prices for the first three months of 2013 is eerily similar to 2011 and 2012. It has gone something like this: The year begins with new optimism over the economy and stabilization in Europe, pushing stocks to new recovery highs. Then as April begins, the U.S. recovery is questioned, markets realize Europe is not fixed, and U.S. stocks erase most of their gains for the year by the end of June.