Christmas is still three days away, but the stock market hasn’t waited for Santa Claus to come down the chimney to start celebrating. Last week, the Dow Jones Industrials (DJINDICES: ^DJI) climbed almost 525 points, and today, the Dow continued to add to its impressive recent performance with another 80-point jump as of 12:15 p.m. EST. Tech stocks led the Dow higher, with Intel (NASDAQ: INTC) climbing more than 2% and Cisco Systems and IBM also posting strong gains. Chevron (NYSE: CVX) was among the biggest losers in the Dow, with crude oil prices once again heading lower after a brief respite last week.
One thing that routinely happens at this time of year is that you’ll start hearing about seasonal influences on the stock market. Mentions of things like the Santa Claus rally and the January Effect start making people focus on short-term trading tendencies, with apparent riches available to those who try to capitalize on these phenomena. With the market already close to record highs, many traders believe that a Santa Claus Rally will be the next catalyst that sends stocks higher.
It’s true that if you look back at the stock market’s historical performance, you can find certain periods of time during which stocks perform better than others. Over the past 65 years or so, stocks have generally moved up during the last five trading sessions of the year. Looking more closely, you can see numerous instances during which small-cap stocks performed better than their large-cap counterparts during the month of January.
Such patterns make many traders believe that they’re reliable indicators of what will happen in the future. Yet long-term investors need to keep a couple things in mind before putting a big stake in these short-term factors. First, expecting to reap average gains by following these strategies this year isn’t necessarily reasonable. Historical data shows that the typical Santa Claus rally produces about a 1.5% return. But with stocks already having rebounded so far in recent days, expecting even more follow-through for the remainder of the year could prove to be overly optimistic. Conversely, with small-cap stocks having underperformed large caps through much of 2014, the chances that small caps will bounce back in early 2015 could be greater than average.
More importantly, even considering short-term factors takes your focus away from where it should be: how the companies in which you’re investing will perform over years or even decades. Even if a seasonal indicator proves correct, earning a couple of percentage points will be insignificant compared to the hundreds or even thousands of percentage points that you can reap from a smart long-term stock investment.
For example, Intel has been doing a good job of catching up after letting its rivals capture a large part of the mobile-chip market. With initiatives like the Internet of Things opening up new potential for all sorts of tech applications, Intel, Cisco, IBM, and other tech giants are working hard to capitalize on the new opportunities to build technology into previously untapped areas of our lives. Those influences will have an impact on share prices not just today, but for years as companies strive to squeeze every bit of profit from these growing areas.
As a way of entertaining investors, the Santa Claus rally and other seasonal factors give people a reason to focus on short periods of time. For investing success, though, your better choice is to look at the long term and ignore day-to-day fluctuations in favor of understanding what your favorite businesses will do to make a prosperous future years down the line.
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