December Swoon: Bad Omen or Momentary Blip?

Stocks have taken a rare step back in December. Is it a sign of things to come, or yet another momentary pullback before another push to new market highs?
Halfway through the stock market’s most profitable month, stocks are struggling.
The S&P 500 dipped below 2,000 for the first time in two months yesterday. The Dow Jones Industrial Average just had its worst week in three years. The Nasdaq is down 3.5% this month.
That’s not the type of performance we’re used to seeing this time of year.
December is historically the best month for U.S. stocks. Since 1950, the S&P 500 and Dow have averaged a 1.7% return in December, while the Nasdaq has averaged an even more impressive 2% return since its inception in 1971.
There are still two weeks to go this month. But isn’t the December we’re used to. No December since 2009 has posted a negative return.
Why the sudden swoon? Is the recent downturn amid what is usually the best month for stocks a bad omen for the year ahead? Or, is it simply another momentary – albeit unusually timed – blip on the radar screen of this three-year rally?
I’d bet on the latter.
For one, certain Wall Street “experts” – or at least the talking heads on CNBC and the headline writers on Yahoo! Finance – repeatedly (and predictably) insist that the sky is falling every time stocks have showed the slightest sign of weakness. They’ve been wrong every time. Despite a close call in October, the S&P 500 still hasn’t had a pullback of 10% or more since July 2011.
Over the past two years, there have been a number of mini-pullbacks that have been worse than this one. After every one of them, stocks have bounced back to new record heights within a matter of weeks.
Another reason to think the latest pullback is more momentary blip than the start of a longer trend is the current economic conditions. Unemployment is at its lowest point in six years. U.S. gross domestic product has grown 4.6% and 3.9% in the last two quarters – the best back-to-back quarters since the recession. Third-quarter earnings had the highest beat rate since 2010.
It’s true that Black Friday sales were disappointing. But that could be more a shift away from the long lines and congested stores that come with America’s busiest shopping weekend. Check again on retail sales results at the end of December. If they’re still underwhelming – especially with gas prices at their lowest level in five years – then that could be a legitimate concern.
This rally has endured far worse than weaker-than-expected retail sales.
Sequestration, near-government defaults, endless geopolitical strife, the ongoing European debt crisis – investors have ignored them all the past few years, sending stocks to new heights on almost a monthly basis. At this point, until we actually see stocks pull back by at least 10%, I wouldn’t expect a correction is nigh. Doing so could convince you to foolishly sell off some perfectly sound long-term investments. That kind of needless panic can cost you some serious returns.
Say, for example, you panicked when stocks declined nearly 9% from Sept. 18 to Oct. 18 and sold out of some of your positions. You would have missed out an 11.5% gain in the S&P 500 over the ensuing six weeks.
Don’t make that mistake.
The Chicken Littles on Wall Street have been wrong about a correction time and time again these last couple years. When the sky is actually falling, you’ll know it.
Until that happens, don’t change your approach.

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