Y2 Buy Stocks

By Daniel Kadlec

Wall Street has more holiday traditions than the North Pole, starting with a Santa Claus rally each December, followed swiftly by the January effect, January barometer and, finally, Super Bowl indicator--all of which are supposed to say something about where stocks are headed. As you might guess, much of the Yuletide lore is pure eggnog. But there's no denying that this season can be magical. The stock market's best months, hands down, are November through January.

Since 1950, those three months have produced more market gains than the other nine months combined. And we're at it again. Since Oct. 31, the S&P 500 is up 5.2%, the Dow 5.2%, the NASDAQ composite a heady 19%. Yet many investors are sitting on the sidelines, waiting out the Y2K fiasco. (You know, mayhem that would make Moses proud when computers misread 00 as 1900 on Jan. 1.) Yes, stock prices could unravel if Y2Khaos really occurs, or if anything else for that matter ignites a panic. Can you say higher interest rates? But serious jitters seem a long shot. The market has already stood firm against three interest-rate hikes. As for Y2K, I believe the panic came when tech stocks hit the skids last summer. Done. Finito. The market is now looking well past the millennium, having got comfortable with the notion that it will pass with barely a sputter. For that and other reasons, this year's seasonal lift could be something special.

That's not a prediction. It's an alert: the table is set for a sharp run-up through January. You can't count on it, and please hold the nasty e-mail if it doesn't happen. But timing the market rarely works anyway, so why not give yourself a chance. If you're tempted to cut and run--don't; and if you have cash earmarked for stocks after the New Year, start investing now.

John Cleland, chief investment strategist at fund company Security Benefit Group, is so convinced that stocks will "melt up" next month that he has begun a special marketing campaign to attract new money by year's end. "Y2K will be the biggest nonevent in history," he predicts. "The door will not be wide enough for everyone who wants to buy stocks in January."

I'm not so sure about his melt-up prediction: a 20% Dow gain in the first quarter, Cleland forecasts. But I buy into the case for a strong market big time. Many companies fund their pension obligations in January, giving the market a boost. And there really is a January effect. Stocks that had been sold purely to lock in tax benefits the previous year tend to get noticed and bid higher early in the New Year, often resulting in a rally led by small stocks. There will have been plenty of tax selling by the end of this year. Roughly 60% of all stocks are down for the year, according to Salomon Smith Barney.

Meanwhile, cash has been piling up in money-market funds--$37 billion in October, the most since the Asian contagion--and flows into stock funds have been tepid. Y2K worrywarts, it seems, are hoarding more than bottled water and canned food. How should you invest? If Cleland is right, pent-up demand will lift everything, and popular tech stocks will get more popular. The traditional approach is through beaten-up small stocks, which may be coming into favor anyway. Salomon Smith Barney likes beaten-up big stocks, including Fluor, H&R Block and Hasbro. You've got choices. The first one, though, is to be invested.

See time.com/personal for more on the January effect and other seasonal market patterns. E-mail Dan at kadlec@time.com