The bullish December that stock investors often enjoy never met a sovereign-debt crisis like this.
Europe's persistent debt problems, which have whipped U.S. stocks for months, show few signs of abating, leaving Wall Street's year-end stock-index targets all but out of reach.
Historically, December is the second-best month of the year for stocks after July. In addition, U.S. markets so far have suffered only limited damage from the market's other bogeyman—Washington's deficit-cutting impasse.
But many strategists are focused on the rise in European bond yields and worries that an economic slowdown in Europe could pre-empt the U.S. economic recovery.
"Seasonally, the market does have a tailwind, but whether it's going to ride that wind depends on whether Europe continues to deteriorate," said Bruce Bittles, chief investment strategist at Robert W. Baird & Co.
Over a span of more than eight decades, the Standard & Poor's 500-stock index has added an average of 1.46% in December, according to Howard Silverblatt, senior index analyst for S&P Indices.
December tends to see many investors buying stocks to revamp their portfolios for the new year, and also to prepare for what seasonally are some of the best months for the market.
In addition, the year's final month often features what's called the "Santa Claus rally," a sharp upswing in the last trading sessions of the year and the first few of the new year.
Since 1950, the five days ending the year and the first two of the new year have averaged a 1.5% gain in the S&P 500, says the Stock Trader's Almanac.
If Santa no-shows, a tough year for stocks often follows.
December 1980 posted a monthly 3.4% loss that preceded the onset of an economic recession and then-Federal Reserve Chairman Paul Volcker's decision to raise the federal-funds rate to 20%. Though there was a 2% Santa rally, the S&P 500 lost 9.7% in 1981.
The S&P 500 shed 0.9% in December 2007 and 2.5% in the Santa sessions as the financial crisis's storm clouds were forming. A slump of 38.5% followed in 2008.
The index managed a 0.8% rise in the final month of a difficult 2008 with a very bullish 7.4% gain from Santa. Stocks soon bottomed. The S&P 500 surged 23.5% in 2009.
In recent weeks, Europe's debt problems have overshadowed some of the best U.S. economic reports. Corporate earnings that mostly beat forecasts have done little to lift stocks.
"My outlook for a year-end rally is not as favorable as it was a month ago," said Peter Coleman, director of research for JMP Securities. "The sad thing is, the underlying fundamentals and the things that should be driving the market haven't really changed. If anything, they've gotten incrementally better. But the big unknown is Europe."
The Dow Jones Industrial Average fell 4.8% for the holiday-shortened week, posting its worst Thanksgiving week since markets began observing the holiday in 1942. Currently, the S&P 500 trades just under 1159, down from a recent closing high of 1285.09 in late October.
Strategists at 12 of Wall Street's leading financial firms, on average, expect the S&P 500 to end 2011 at 1278, according to Birinyi Associates, or more than 10% above current levels.
At the beginning of 2011, these strategists were anticipating a year-end target of 1365.
Deutsche Bank AG's Binky Chadha is the most bullish of the bunch, with a 1425 target. J.P. Morgan Chase & Co.'s (JPM) Thomas Lee, who had been the most optimistic, cut his S&P target to 1350 from 1475 this week, saying it would be a challenge for stocks to surge so quickly. Goldman Sachs Group Inc.'s (GS) David Kostin, at 1200, has one of the most bearish predictions.
Mr. Kostin was expecting a year-end target of 1450 at the beginning of 2011 and he actually boosted his prediction to 1500 after that. But he reduced that view throughout 2011.
To be sure, there is a chance, although analysts see it as slim, that European governments will harness the Continent's debt burden with an expanded bailout facility. Central banks also might reach a consensus that Europe's problems are serious enough to spur even more bond buying, or so-called quantitative easing, which could juice global stock markets.
But even for strategists who see hope for stocks, Europe remains the biggest problem. "You can't remember the last time we had a major disappointing fundamental report," said Jim Paulsen, chief investment strategist at Wells Capital Management. "You almost get a sense of, 'Who cares?'"
