Fiscal Cliff issues continue to weigh on equity markets. The issue intensified after the close yesterday when Secretary Treasurer Timothy Geithner informed the Senate that the statutory debt ceiling will be exceeded on December 31^st. The government has the ability to continue to operate until March using various short term accounting measures. However, the pressure is increasing on Congress to reach at least a short term “kick the can down the road” deal that addresses specific issues that expire January 1^st. The VIX Index jumped more than 9% yesterday.

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One of the best known seasonal events on Wall Street and Bay Street is the Santa Claus Rally. The event traditionally happens from just before Christmas Day to just after New Year’s Day. Investors consider price gains during this period as Santa’s gift to equity markets. The event is more than a guy in a red suit coming to town. Influencing factors include upbeat investor sentiment, lighter trading volumes, encouraging economic news, bullish reports by investment dealers highlighting prospects for the following year, expectations for seasonally strong fourth quarter earnings and the investment of year-end bonuses. In addition, equities pressured by year-end tax loss selling frequently rebound from bargain prices.

The Santa Claus rally is the strongest three week period of the year for U.S. and Canadian equity markets. Thackray’s 2012 Investor’s Guide notes that average return per period for the S&P 500 Index from December 15^th to January 6^th during the past 61 periods was 2.0 per cent. Profits were realized in 46 of the past 61 periods. Returns from the NASDAQ Composite Index were jollier. Average return during the past 40 periods was 3.0 per cent. Profits were realized in 31 of the past 40 periods. The TSX Composite Index since its reconstruction in 2000 has gained in 10 of the past 11 periods. Average gain per period was 3.0 per cent.

Conditions for a Santa Claus rally this year are favourable. Chances are high that Congress and President Obama will resolve the “Fiscal Cliff” before the end of the year. A resolution will remove a major uncertainty for equity market and will set the stage for U.S. and Canadian corporations to employing their huge cash positions. Canadian corporations hold cash equivalent positions valued at more than $560 billion. S&P 500 companies excluding financial institutions hold cash positions valued in excess of $1.5 trillion.

Other news also could help during the current Santa Claus rally. Economic news is improving. Recent economic reports show that growth in Canada and the U.S. is slightly accelerating albeit from a very low level. Growth is supported by record low interest rates in both countries. In addition, investors will begin to anticipate the release of encouraging fourth quarter and annual earnings reports when chief executive officers traditionally try to give shareholders good news. Earnings news from Canadian companies is expected to be better than news from major U.S. companies. Consensus for fourth quarter earnings by the S&P 500 companies is a year-over-year gain of 3.0 per cent. Consensus for Canada’s top 60 companies is a year-over-year gain of 6.3 per cent.

A wide variety of sectors are available with a history of outperforming the market during the year-end rally period: Best performing sectors include Small Caps, Home Builders, Metals & Mining, Biotech, Technology, Industrials and Consumer Discretionary. Exchange Traded Funds with exposure to these sectors include iShares Russell 2000 Index (Symbol: IWM US$84.12), SPDR S&P Homebuilders Index (Symbol: XHB US $26.77), S&P Metals & Mining (Symbol: XME US$29.32), NASDAQ Biotech (IBB US$139.07), Technology SPDRs (XLK US$29.32), Industrial SPDRs (XLI US$38.25) and Consumer Discretionary SPDRs (XLY US$47.91). Equivalent ETFs, that trade in Canadian Dollars, include iShares Russell 2000 Index Canadian Dollar Hedged (XSU $18.30), Global Metals and Mining iShares (CMW $17.63) and BMO Equally Weighted Metals and Mining (ZMT $13.52). All currently have a favourable technical profile.