The Rally Won’t Last Forever, Even If Santa’s in Town

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What the market will do in the new year is always a favorite topic for speculation come Christmas time. The rally in U.S. equities in 2013 has been nothing short of amazing, and investors are looking forward to another strong, if not quite as spectacular, year in 2014.

Minus a monetary, fiscal, or psychological shock, history suggests that 2014 will be a year of modest gains. Estimates vary, but historical data compiled by LPL Financial Research indicate that the S&P 500 index averages gains between 6.5 and 12 percent following years in which it climbs between 20 and 30 percent. (For the record, the S&P 500 is up about 25 percent this year through Christmas.)

In the short term, though, investors can expect a little bit of volatility. For one, investors are braced for a little upside potential with the Santa Claus rally. First described by Yale Hirsch, creator of the Stock Trader’s Almanac, in 1972, the Santa Claus rally occurs during the last five trading days of the year and the first two trading days of the new year. Since 1950, the S&P 500 has averaged a gain of 1.5 percent during this period. Since 1896, the Dow Jones Industrial Average has climbed an average of 1.7 percent during this seven-day trading period, climbing 77 percent of the time.

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