Smart Money...Rick's Blog It’s Human Nature to Extrapolate the Current into the Future – But It’s Not Always a Good Idea Almost exactly nine years ago, March 9, 2009, the stock market ended the day down yet once more and it seemed there was no bottom in sight. At that date the Standard and Poor’s 500 had fallen about 57% from an all-time high reached just about a year and a half earlier.1 But instead of going higher as most forecasted, the markets were in their steepest decline since the Great Depression in the 1930s. The headlines and predictions were mostly about how much further the market could fall. However, the next morning instead of continuing the decline, to what was already a 17 month long bear market, stocks started to rise. And rise. And rise. Climbing to where we are now, even after a number of corrections along the way, up about 400%.1 Two dramatic lessons on the dangers of extrapolating the stock market’s current performance at any given time.As this year started most investors and analysts were calling for a continuation of the market’s climb. And, just for the record, so were we.But are we all in danger of simply extrapolating last year’s fabulous results into the future?For our part, while we expect the stock market to move higher, we are not expecting as robust of a year.Fundamentally, this soaring stock market has had the benefit of both of its two big engines - corporate earnings and low interest rates - working for it. Going forward we think the interest rate engine is going to lose some of its driving power. We will still climb, but more than likely at a more measured pace and with a lot more effort.It is a pretty safe bet (not certain, but pretty certain) to forecast interest rates will be rising. In fact, we should see an increase later this month when the Fed meets. The uncertainty comes in trying to figure out how much and how fast future increases will be. And this is important. You already had a preview of how damaging rising interest rates can be to the market. When the yield on the 10 year Treasury note rapidly rose ½ % in the first month and a half of this year, the Dow Jones tumbled 9% just as quickly.1Part of the problem we face is we are in unchartered waters. In recent time the Federal Reserve has never been raising rates from such a low starting point, and at the same time reining in the massive bond buying program they initiated to help stabilize the country’s, and perhaps the world’s, financial structure. Both Fed actions will push rates higher, but how quickly and how high is the question.Add in possible unintended consequences from the passage of a very aggressive tax reform act, and now tariffs that no one seems to be able to agree on, and you can understand why we believe the environment for stocks and bonds is not liable to be simply a continuation of last year.1 Wall Street Journal Do You Believe In The Santa Claus Rally?You may no longer believe in Santa Claus but there is a very good reason to believe in the Santa Claus rally.What exactly is the Santa Claus rally?Well, Wall Street, being a very competitive and stressful business, seems to try to add a little levity by coming up with some cute little phrases like “sell in May and go away”, etc. Most of these catch phrases actually have some basis to them, although I wouldn’t do my investing based on them.However, the Santa Claus rally, which refers to the stock market making a good little run near the end of December, does have a real basis for it.Why? Well, putting general economics aside, there are several factors that converge toward the end of the year that contribute to this phenomenon.If it has been a successful year, such as this one, many fund managers and traders - notice, I said traders and not long term investors - look to sell in late November and early December to lock up profits to get bonuses, etc.Also in early December many mutual funds make sizable distributions of capital gains and interest and that reduces the fund’s net asset value by the same amount. For example, shares that are selling at say $14, after a distribution of $2, would be selling for $12. So if you don’t plan to hold the fund much longer anyway, it could make more sense to sell it before the taxable distribution is made.These two factors alone add more selling pressure than normal to the market.Now couple this with the fact that historically the market is often very good at the start of the year as new money comes in from retirement and pension plans. There are no guarantees of course. Just last year the market broke from this pattern falling instead about 10% in the first six weeks of the year before rebounding and eventually finishing the year up in double digits.Nevertheless, you can see if investors believe January will get off to its usual strong start, then they would want to get all that money raised from all the selling, right back into the market, driving up prices. Thus the spurt that leads to the phrase the Santa Claus rally.