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Santa Claus Will Be Bringing Us a Rally in 2012

The threat of an earnings slowdown in the current quarterly reporting season has many investors worried about what’s next for the stock market.

After all, you can’t cut your way to growth — and with the American economy chugging along at an anemic 1.3% annual rate, the turmoil in Europe, geopolitical strife in the Middle East and continued fear of a China slowdown … well, you can understand the general feeling of gloominess on Wall Street.

Of course, historically speaking, the fourth quarter tends to be very kind to investors. There are a host of reasons for this trend — from the logistical boost of year-end rebalancing activity to the psychological boost of the holiday season to the fiscal boost provided by consumer spending around Christmastime.

So we are at odds, it seems, in the fourth quarter. Poor earnings threaten to leave a lump of coal in our stockings … but will that ruin the overall “Santa Claus rally” that investors are used to as we approach a new year, or can we depend on seasonality even in these difficult times?

I just talked with Louis Navellier, editor of Blue Chip Growth among other stock-pick newsletters, and he is looking forward to a big seasonal bounce in the months ahead.

There are a few reasons for this — and not just the typical seasonality arguments:

Low Earnings Expectations: Oddly enough, the earnings gloom is one reason why Navellier is bullish. “When analysts are extra cautious you often have bigger surprises, and I expect the biggest surprises in consumer stocks,” Navellier told me. “It will be a good earnings season — well, a good surprise season. The only negative is that earnings are going to be a little more narrow.” He’s particularly bullish on consumer stocks like Whole Foods (NASDAQ:WFM), Home Depot (NYSE:HD), AutoZone (NYSE:AZO) and others right now.

The American Consumer: Keeping with that trend, Navellier is bullish on consumer spending and the power of consumer stocks even as the rest of the world is feeling the pressure of higher food and energy prices. And while we feel those pressures at home, for the most part U.S. consumers are doing well and are the “oasis” right now, according to Navellier. The numbers seem to bear this out; in late September, consumer confidence rose to the highest level in seven months. And with the headline unemployment rate dropping below 8% in the latest report, you can bet that will bode well for the next few readings, too.

QE3: Even though each successive round of Fed activity had less punch, the impact still is overwhelmingly positive. “In the first round of quantitative easing, the market popped 36%,” Navellier said. Next time it was 24%. Extrapolate that this time around and I guess we’ll go up 18%.”

No Alternatives: Put plainly, Navellier said, “There’s nowhere else to go.” High-yield savings accounts are around 1%. Treasuries can’t even keep up with inflation. The bottom line is that the market yields more than everything else, and that bodes well for stocks.

I’m on board with most of those points — particularly the last one. Although I have my doubts about a rip-roaring holiday season if the fiscal cliff continues to cast a pallor over the end-of-year festivities. Knowing a big tax hike is right around the corner could put a damper on spending. Let’s not underestimate the power of headlines when it comes to shaking the fragile confidence that consumers are starting to get back.

What do you think? Share your comments below.

Related Reading

  • Read more about Louie’s bullish take on Q3 earnings despite lower forecasts. (The Slant)
  • More on the consumer front: Confidence rises for six straight weeks, the longest stretch since 2006! (Bloomberg)
  • From the archives of Christmas past: Last year, the Santa Claus rally delivered almost 2% returns across the December holidays. The longer view, dating back to Thanksgiving and through New Year’s, delivered an impressive 10% gain in the S&P across that larger window. (MarketBeat at the WSJ)

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he owned a position in Alcoa but no other stocks named here.

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