Focus is now on the 'Santa Claus rally'

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By Malcolm Morrison
THE CANADIAN PRESS

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TORONTO - Stock markets could be in for a continuation of strong gains racked up last week -- but for that to happen, investors will have to remain composed in the face of what is likely to be more dreadful economic data.

"The litmus test for this week will be if the markets can hold ground despite the negative stuff that is coming out, and it's all going to be negative next week," said Andrew Pyle, wealth adviser at Scotia MacLeod in Peterborough, Ont.

"The concerns of the market right now are obviously focused on the economy. Whether or not a sustainable stock market rally is going to take place in December, the so-called 'Santa Claus rally' that everyone has been talking about for a couple of weeks now, that's the focus."

The Toronto stock market gained 1,116 points or almost 14 per cent last week as investors piled back into beaten-down commodity stocks, in part because the Chinese government announced a stimulus package and a cut in interest rates, raising hopes that the moves will stabilize metal prices and increase demand.

New York likewise had one of its best weeks this year, up 783 points or 10 per cent.

The major economic event on the calendar this week is employment data for Canada and more particularly the United States. Despite the strong headwinds battering the American economy, analyst expectations for U.S. job losses during November are modest, around 77,000.

And that could set up investors for a major disappointment at the end of the week.

"The actual survey (of 77,000) I think is pretty tame, I think it's probably too tame, I think we're going to see something over 100,000," said Pyle.

In Canada, economists expect to see job losses of around 40,000 as economic conditions deteriorate with the jobless rate rising two tenths of a point to 6.4 per cent.

The other notable piece of Canadian economic data comes out on Monday. Statistics Canada is expected to announce that third quarter GDP actually rose at an annualized rate of 1.5 per cent.

However, analysts predict that broad-based weakness is expected to take hold in the current quarter.

"GDP is now expected to drop at almost a two per cent annual rate in that quarter, with further declines expected in the first half of next year," BMO Capital Markets said in a briefing note.

Another wild card this month is tax loss selling.

Investors typically sell off stocks that have lost value close to year-end in order to offset any capital gains and the deadline for this is the end of December.

Pyle observed that in a normal year, investors take care of this early in the month.

"One of the reasons for that is when you sell something at a loss, you have to wait 30 days to buy that thing back," he said.

But he observes this is not a normal year.