BLOG: What happened to the Santa rally?

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Written by: Cherry Reynard
17/12/2014
Stock markets suddenly look a little bleak. Far from any ‘Santa rally', markets have fallen by around 10 per cent for the Christmas period to date.

This is perhaps not the festive season for which investors had been hoping. Is it simply a few gloomy traders who didn’t like their Christmas lunch? Or is there more at work in the recent market volatility?

It should be said that it is difficult to trust markets in December. Because lots of people are on holiday, out of the office, literally and metaphorically out to lunch, the actions of relatively few market participants can have a disproportionate influence. Markets lack the (relative) sanity that comes with lots of buyers and sellers.

However, there are a number of things about which investors are legitimately concerned. Weak inflation is one. Although lower inflation can seem like good thing – less chance of an interest rate rise, more money in the pocket of consumers – it raises the possibility of deflation. And deflation is the greatest fear for stock markets and central bankers alike.

There is also the problem of the oil price. The lower oil price is partly responsible for lower inflation, but is also creating geopolitical instability. The lower oil price is undoubtedly contributing to Russia’s economic weakness, for example: It is already burning through its foreign exchange reserves at significant speed and has had to hike interest rates to 17 per cent – to the detriment of the long-term strength of the economy – to protect the ruble, which continues to slide.

In theory, the oil price slide should be good news for consumer-dependent economies such as the UK or US, or oil importing countries, such as Japan, but OPEC’s lack of intervention has markets troubled. Conspiracy theorists have suggested that OPEC is trying to destabilise shale gas producers in the US. If this is the case, it may threaten the US’s long-term path to energy independence.

It is natural resource stocks that have borne the brunt of the market’s decline, weakened also by declining manufacturing figures from China. However, the banks have also seen volatility following the recent stress tests, which showed that any return to dividend payouts seems unlikely in the medium term.

In the UK, the markets are also troubled by the prospect of the election next year. Some expert investors, such as Neptune’s Robin Geffen, have gone as far as to sell out of the UK, fearful of the disruption a change of Government may cause. Certainly, Labour has shown itself uncompromising in its relations with the City – over energy bills, tobacco and banking, for example – and inevstors are right to be nervous on the impact of a victory for the UK left.

In the meantime, investors have a few choices. They can sell out, in the hope that they miss any further falls. This usually tends to be a bad idea. Statistics suggest that those who try to shift in and out of markets on its peaks and troughs tend to end up losing more money than those who look to the long term and remain invested throughout.

Investors could hang on, hoping that 2015 will bring a change in sentiment on the part of investors and they will recover any losses. Or they could buy a little more. This will feel like the most uncomfortable option, but with markets down 10 per cent, it is considerably less risky than buying three weeks ago.

The old rules of investment apply: do not panic and look long term. There is nothing – yet – to suggest that the world economy is going to hell in a handcart, but surprises can and do happen. At the time of writing, markets already appear to be starting to stabilise. Hoping for a Santa rally may now be optimistic, but there is no clear reason for investors to believe that the recent sell-off is the start of something more prolonged.

Cherry Reynard is acting editor of YourMoney.com

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