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Start of ‘Santa Claus’ Rally?

Stocks leapt this morning following the central banks’ moves to shore up the global economy, but advisers say the news is unlikely to kick start an end-of-year rally.

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The market’s mood tends to brighten in December in what’s often referred to as the “Santa Claus” effect. In fact, stocks have risen in the fourth quarter nearly four out of five times since 1945, according to Standard & Poor’s Capital IQ. And over that same time period, the S&P 500 index has gained an average 7.2% in the fourth quarter, following an average 10% drop in the third quarter—similar to what we saw this year.

Many pros are staying defensive in the last weeks of the year, having already cut back on equities earlier in the year. For example, Marilyn Plum, a financial adviser in Lafayette, Calif., moved about 5% of her clients’ portfolios out of equities and into alternatives like commodities and real estate. “The foreign markets are daily drama and the U.S. markets are too,” says Plum. “There’s no consistent good news.”

Indeed, advisers remain skeptical the optimism can last through the rest of the year — or even the rest of this week. “It may come up to the last day of the year to see if we’re positive or not,” says David Moore, chief investment officer with Gibraltar Private Bank & Trust in Coral Gables, Fla.

To be sure, some advisers say the turbulence has made stocks cheap, creating opportunities for brave investors who want to buy on market dips.  Moore prefers dividend-paying stocks because they provide consistent cash flow throughout the volatility. He is holding more cash to be ready to increase stock exposure for some clients after markets sink.

Other advisers are telling investors to tune out the daily swings. Frank Armstrong, president and founder of Investor Solutions, an advisory firm based in Miami, says the central banks’ program isn’t enough to resolve the debt crisis in Europe, which is likely to weigh down markets again before year-end. “It’s a band-aid,” says Armstrong, who is encouraging clients to avoid moves based off of the daily news. “Investors have to gut it out and keep their eyes on the long-term horizon.”

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