Cold weather could
chill investors

A freeze on the East Coast may
drive up oil prices, hurting stocks,
or so the thinking goes

NEW YORK » December has earned a reputation for being a good time for stocks, a seasonally strong period when investors are full of holiday cheer and feeling flush thanks to year-end bonuses.

In fact, the last month of the year has delivered an average gain of 1.6 percent on the Standard & Poor's 500 going back to 1950, according to the Stock Traders' Almanac. Over the last 54 years, stocks have lagged in only 13 Decembers.

But this year, after a solid post-election advance and with the major indexes already hovering in the range of many analysts' 2004 projections, a Santa Claus rally is far from a sure thing. Volatile oil prices and a feeble dollar are formidable impediments to a further move up in 2005. But many market watchers, including Kenneth McCarthy, chief economist with vFinance Investments Inc., think those can be overcome in the near-term.

"As long as oil prices don't rise substantially, if we remain in the mid-$40-per-barrel range or even a bit higher, I think the market has a good deal of momentum and can rise a bit, especially if we see some good retail numbers," McCarthy said. "I'm fairly optimistic that this could be one of those Decembers when prices rise."

One number you might want to keep an eye on next month that's not always associated with investing is the temperature. In the National Oceanic and Atmospheric Administration's final winter outlook, issued Nov. 18, forecasters predicted an enhanced likelihood of lower-than-average temperatures in much of the East, Middle Atlantic and South. With heating oil supplies well below year-ago levels, it wouldn't take much cold weather to rattle the markets, McCarthy said. Stocks have been extremely sensitive to changes in oil prices since crude passed the $50-per-barrel mark in October.

"Oil prices have been jumping around week to week, depending on what happens with inventories and the weather," McCarthy said. "If we get a significant cold snap, that would probably be a negative for stocks, believe it or not. If, on the other hand, it's a very mild December, that could help the market."

The fear is that a spike in home heating oil prices could divert consumer spending during the holiday shopping season, which is being closely watched amid strong hopes that it will be the most profitable Christmas for retailers since 2000.

Other events that could move stocks include the Labor Department's Dec. 3 report on November job growth and the Dec. 14 meeting of the Federal Reserve's Open Market Committee. With a number of indicators pointing to higher inflation, the committee is widely expected to raise the federal funds rate -- the short-term interest banks charge each other on overnight loans -- another quarter percentage point to 2.25 percent. Investors also will be closely watching the accompanying policy statement for hints about the pace of tightening in the year ahead.

The cycle of rising rates means bond yields will continue to climb, suggesting a move up in mortgage rates and some cooling in the housing sector, said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. Higher yields are also likely to raise borrowing costs for consumers, which will pressure demand for durable goods, and may ultimately lower expectations for 2005 profit performances. For equity investors, it all adds up to slower growth in the year ahead.

"I think it's an environment where risk-taking is worthwhile, but when you look at the averages, you have to have more modest expectations," said Battipaglia, who thinks the S&P 500 is likely to end the month somewhere between 1,180 and 1,200, for a 6.1 percent to 7.9 percent gain for the year.

"In many respects, the market is behaving in a traditional pattern, which is actually quite comforting," Battipaglia said. "It's not something to despair over. Investors just have to get used to a more modest performance for equity prices."