Poised For The Christmas Rally?

Since experiencing the late November 10% market correction, when stocks fell from their October high of 14,164.53 to 12,743.44, investors have been looking for a reason to believe the current bull market was not on its way to extinction. Wednesday's data gave plenty of reasons to believe there is still some upside potential in this market. While the disruptions in the housing and credit markets during the late summer and fall are still very much in the picture, I am sure the Fed has got to feel it has some breathing room, insofar as monetary policy is concerned, going forward.

On Wednesday, the U. S. stock market added 196.23 points for the day after data released in the morning cast a more optimistic light on the U.S. economy, while leaving intact hopes of another interest-rate cut next week. Before the opening bell rang, major stock index futures had extended early gains after ADP reported hiring in the private sector expanded at a faster pace in November, gaining 189,000 jobs after a revised 119,000 jump in October. The latest monthly hike is well above forecasts calling for a rise of 60,000. In another report, the Labor Department said productivity in the nonfarm business sector rose at a 6.3% annual rate in the third quarter, an upward revision from the 4.9% tally a month ago. Also, the government revised unit labor costs down, showing a 2% annual decline compared to a 0.2% drop estimated a month ago, which signals milder inflationary pressure than previously thought. Later in the morning, the Commerce Department said orders for U.S. made factory goods climbed 0.5% in October, its biggest increase in three months. The Institute for Supply Management repoted its nonmanufacturing index declined to 54.1% in November from 55.8% in October, with the drop larger than expected. "The economic news that we got today was quite positive. We saw factory orders go up and we saw the non-manufacturing sector continue to grow," said Peter Cardillo, chief market economist at Avalon Partners.

A great article in the Wall Street Journal recently dicussed some of the lessons that were hopefully learned by investors during this wild year. Dan Fuss, of Loomis, Sayles and Co., stated one of the lessons investors should have learned this year is that "The worst thing you can do is get into frequent asset reallocations. There's a financial cost going from fund A to fund B. The more important cost is that it messes up your thinking about what it is you want to accomplish with these funds". John Bogle of Vanguard Group feels the lesson learned this year is "Don't let your emotions drive your investment program, because you will be thinking of getting in and out. For investors the best rule by and large is to ignore daily moves of the stock market". Jeremy Siegle of the Wharton School of Business opined, "It's very important not to be caught up in the prevaling sentiment, because usually those are not good times to sell when the market is going down. In fact, this is really an illustration of the importance of what we call dollar-cost averaging".

Disciplined, non-emotional investing has been my mantra over the years and is definitely the way to go for investors. Dollar-cost averaging works quite well in volatile markets like we have seen this year, because the chance of buying shares on sale increases when monthly purchases are made in a volatile year. It is fantastic to have such respected business and investment colleagues reinforcing what you've always believed.

John Kaighn

Jersey Benefits Advisors

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China Hiccups

The US markets opened lower today, as investors digested the overnight news from China. Stocks in China were down sharply on Wednesday because the government raised a tax on stock trades. The reason for this tax increase is an attempt to dampen some of the enthusiasm for stocks, due to a market boom. There are growing concerns about a possible bubble.

The main Shanghai Composite Index dropped 6.5 percent to 4,071.27 after hitting a record high on Tuesday. The Shenzhen Composite Index for China's smaller secondary market closed at 1,199.45 a decline of 7.2 percent. The market plunge came on the heels of an announcement by the Finance Ministry that tripled the "stamp tax" on stock trades from 0.1 percent to 0.3 percent. The change was effective Wednesday, as the the official Xinhua News Agency reported the ministry was trying to "cool the stock market".

The last time stocks plunged in China, which was February of this year, emerging markets took it on the chin. Stocks in the US and other mature markets also swooned as investors reacted to the news. Anytime you have a precipitous drop in a major market, there are bound to be ripple effects in all of the world's markets. One thing to remember is the fact that the markets do not move in a straight line, so after a period of increasing share prices, one has to expect a decline sooner or later. Hopefully, this will not be a correction that reclaims all of the gains made this year, but it is a distinct possibility. If you have a few dollars sitting on the sidelines, this may present an opportunity to buy shares at a lower cost. For those of you who continually dollar cost average, you will automatically reap the benefits of any sale on shares.

Later in the day, the US markets responded to the release of the FOMC minutes, as the S&P 500 index advanced to its first record close in more than seven years ending at 1,530.23. Investors concluded from the Fed report the evidence of a cooling economy might be a reason for the Federal Reserve to begin cutting interest rates in the second half of the year. The DJIA also closed in record territory at 13,633.08 as the markets shrugged off the news from China. Sometimes you just never know how the market will react to news, which is why I always recommend not letting emotion rule your investment decisions.


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