Central Banks Save The Day- Again
What Is The Santa Claus Rally?
Here is how Wikipedia defines a A Santa Claus rally, “It is a rise in stock prices in the month of December, generally seen over the final week of trading prior to the new year. The rally is generally attributed to anticipation of the January effect, an injection of additional funds into the market, and to additional trades which must, for accounting and tax reasons, be completed by the end of the year. Another reason for the rally may be fund managers “window dressing” their holdings with stocks that have performed well. The Santa Claus rally is also known as the “December Effect” and was first recorded by Yale Hirsch in his Stock Traders Almanac in 1972.”
Easy Money Party Continues…For Now:
Easy money from global central banks has played a major role in sending stocks higher since the historic March 2009 bottom. The benchmark S&P 500 soared when QE has been in effect and fell -17% when QE 1 ended and fell -22% when QE 2 ended. QE 3 ended in October 2014 and stock continued to rally because the QE trade has evolved. In a perfectly orchestrated chain of events- the moment the U.S. Federal Reserve ended QE 3, nearly every other major central bank in the world, stepped in and announced aggressive measures to flood the system with more liquidity.
Q4 2014 Central Bank Review: Hollywood Couldn’t Have Written A Better Script
It has been a VERY BUSY quarter for global central banks. The U.S. Fed ended QE 3 in October. Then almost instantly, we saw the Bank of Japan, The European Central Bank, and China’s Central Bank all step up and announce aggressive measures to join the easy money party. Not to be out done, Russia’s Central Bank and the Swiss Central bank both jumped in one week before Christmas and joined the “let’s distort the market” party. In the middle of December, Russia’s Central Bank held an emergency meeting and raised rates to 17%, up from 10.5% in an effort to stop the Ruble (Russian currency) from collapsing. That didn’t help because one day after the news, the Ruble plunged a whopping 23% in value! That is an enormous move for a currency! On Dec 18, the Swiss Central Bank said they will take rates into negative territory to help stimulate their lackluster economy.
The Central Bank Put Is Alive & Well
For now, all this interference is serving as a strong bullish fundamental backdrop for stocks and is now known as the Central Bank Put. The Central Bank Put suggests that global central banks will step up and “do whatever it takes” to stimulate both Main St & Wall Street. Global central banks are doing their best to “control” markets and that can only last for so long until the patient (global system) becomes numb to the medicine (easy money). History shows us that free-market forces always win, every time. Therefore, it is a matter of when, not if. We are hopeful, that all this interference will end well. But are cognizant of the fact that only time will tell. The market deserves the bullish benefit of doubt until material damage occurs.
