Encouraging data on global manufacturing gave investors an excuse to kick off the new year in style – providing a big boost to what has historically been a key period for setting the stock market's tone for the next 12 months.
Manufacturing activity surveys in several key countries – including the United States, China, India and Canada – showed better-than-expected growth, easing worries about a global recession. Investors responded by shifting away from defensive positions in low-risk government bonds and the U.S. dollar, and into stocks and commodities.
The Dow Jones industrial average gained 1.5 per cent, while the S&P 500 rose 1.6 per cent. Canada's S&P/TSX composite index, with its heavy weighting toward natural resource stocks, received an added boost from surging commodity prices, jumping 253.34 points or more than 2 per cent to 12,208.43, led by gains of almost 5 per cent in the materials sector and 2.6 per cent in the energy sector.
Benchmark West Texas intermediate oil jumped $4.09 (U.S.) to $102.92 a barrel in New York, propelled by the manufacturing numbers as well as rising geopolitical tensions surrounding Iran. Gold rose $33.90 to $1,599.70 an ounce.
The first-day rally for 2012 provides a big boost to two of the most reliable – if head-scratch-inducing – historical patterns observed by trackers of seasonal market trends: The "Santa Claus rally" and the "first five days" (or "early warning") indicator.
The Santa Claus rally refers to the stock market's tendency to rise over the last five trading days in December and the first two in January. The absence of a Santa Claus rally typically precedes downward trends. With one day to go, the S&P 500 is up 1.8 per cent in the Santa Claus period, while the S&P/TSX composite is up nearly 4 per cent.
A strong start to the new year is a remarkably strong harbinger of a positive year to come. Dating back to 1950, when the S&P 500 has risen over its first five sessions of the year, it closes up for the full year 87 per cent of the time, with an average annual gain of nearly 14 per cent.
"It's very good [as an indicator] on the upside, but not so good on the downside," said Jeffrey Hirsch, editor of the Stock Trader's Almanac, the Street's bible of seasonal market trends. In years when the market falls in its first five days, he noted, it's equivalent to a coin toss whether it will close the year higher or lower.
Both the Santa Claus rally and the first-five-days phenomenon are related to the return of money to the market following year-end selling and the holidays. Professional investors routinely sell stocks for tax-loss purposes late in the year, and resume buying once those losses are on the books for the calendar year. Investors also tend to assume more defensive positions when they are away from their desks for the holidays, then return to the market once the holidays are over.
Mr. Hirsch added that many investors kick-start new investments in the new year – resulting in an influx of cash to the market.
"There are reasons these things exist. Humans are creatures of habit," he said, noting that the beginning of a new year prompts people to look forward, often with optimism. "It's a significant time of the year for people.
"You get some decent economic numbers, like we did [Tuesday], and everyone jumps on board."
But Ron Meisels, technical analyst at Phases & Cycles Inc., suggested that money managers may have erred on the side of caution over the three-day New Year's weekend – parking more cash than usual on the sidelines to protect against any unexpected events while the markets were closed. They may merely have been jumping at an opportunity to reverse that move Tuesday.
He noted that the Dow Jones industrial average's 50-day moving average moved above its 200-day average Tuesday, a bullish technical indicator, but the Canadian market is not in nearly as healthy a technical state, with the 50-day average still far below a downward-trending 200-day average.
"If this is [the beginnings of] a new bull market, it's surprising that we're still seeing so much negative," he said.
Mr. Hirsch said that even if the Santa Claus and January indicators point to a stronger 2012, the underlying fundamentals – weak economic growth, debt woes and political uncertainties – should keep the year's gains to less than 10 per cent for U.S. stocks.
"The same problems … are still lingering," he said.