Investors had something to be thankful for this week as the spirit of the holiday added 4% (400 points) to the Average. Stock market strength gained 8% and even gold bounced 2%. There is an old metaphor in investment called the “dead cat bounce” that refers to moves like this. See below.
The “dead cat” signifies the underlying economy, which is showing about the same amount of life as a cat that has spent all of its nine lives. The recent stock market move, well, is just a bounce of optimism that the holiday season often brings on light volume. And when the stock market continues on a childlike run during this time of season it’s often called the “Santa Claus rally.” Regardless of the metaphor, it’s important to note that this time of year is often muddled with all sorts of speculation that makes for irrational stock market behavior.
However, this year “the market” is surrounded by a different sense of hope and peril. First there’s the normal holiday season speculation – how strong will it be, and how will it affect fourth quarter earnings? But while initial holiday market activity looks robust, a major price discount war is being waged between traditional retail and ecommerce sellers. Discounts, while great for consumers, can pinch bottom line results for retailers and lessen positive impact that the holiday season generally has on Gross Domestic Product (GDP) – unless, of course, the discounts encourage substantially more market activity. As usual, there is much to gamble on here.
Ditto with the “fiscal cliff” debate. While many would like to see action before this year ends, there is hope that if this Congress fails the next one could make something happen, and that maybe they can do so early enough in the New Year to satisfy a restless investor base and constituency. But I’ve heard nothing from Washington D.C. that even remotely sounds like a solution – deal points, yes; solutions, no. And by the way, making a deal just for the sake of deal, like the last debt ceiling debate, is just adding insult to injury. A solution in this matter requires courage and leadership – and both are in short supply in the nation’s capital. As a consequence, special interest groups have taken to the airwaves and are pouring lots of money into ad campaigns pressuring both sides of the political aisle. This will create more drama and volatility.
Stay tuned…