Naughty, Nice, or Neither
The 'Santa Claus Rally' axiom... Pay attention to the lead-up... The Federal Reserve's next big meeting... What could move the markets... The good news... Video: Gold set up for a breakout...
December is typically a slow time of the year in the markets...
Trading volumes tend to ease as Wall Street firms take stock of year-end results and folks check out for the holiday season. The stock markets don't entirely close, but a lot of hay is in the barn, so to speak...
That's not to say we can't see some volatility, though, or see new trends develop. For instance, some folks believe in the idea of a "Santa Claus Rally," a spike that occurs over the final five trading days of December and the first two trading days of January.
The concept was first introduced in the Stock Trader's Almanac back in 1972. And historically, the U.S. benchmark S&P 500 and tech-heavy Nasdaq Composite Index have returned 1.3% and 1.8%, respectively, over this Christmas and New Year's Day period.
As with a lot of Wall Street axioms that are generally acknowledged with no real questioning, I (Corey McLaughlin) always find the list of common reasons for ideas like a weeklong rally at this time of year to be more entertaining than anything.
That's because, according to the Corporate Finance Institute...
There are no generally accepted reasons for what causes the Santa Claus rally to occur. The most common reasons include:
- Institutional investors/traders tend to be on vacation during the last week of December, resulting in retail investors driving the stock market, of whom tend to generally be more bullish.
- Investors/trading purchasing in anticipation of the January Effect, which is a hypothesis that there is a seasonal anomaly causing stock prices to increase in the month of January more than in any other month.
- A slowdown in tax-loss harvesting, which has a deadline of December 31.
- Optimism over a coming new year.
- Holiday spending.
These are good talking points, but good luck quantifying any of these reasons as definitive market drivers. Yet, at the same time, the historic numbers give the idea legitimacy. About three-quarters of the time since 1950, stocks have rallied during this period.
So maybe there's something to it. But I bring this up now not to debate the idea's usefulness, but because as I'll explain today, it might be more important to pay attention to what happens over the next two weeks before the so-called Santa Claus Rally period.
First off, our Ten Stock Trader editor Greg Diamond will be watching...
As Greg wrote to subscribers on Tuesday, his trading strategy tells him that key dates are approaching at the end of the December, but that importantly, what happens before this period matters most to him. As he wrote...
Most folks think a "Santa Rally" always happens.
Once again, they don't get it. It's how a market trades into Christmas/the last week of the year that matters.
Just watch... We'll see another inflection point around the last week of December this year, but of course what matters is how the market trades into it.
It's been a relatively active final trading month of the year already. The S&P 500 is off 3%, though volume isn't that high and stocks have traded sideways the past two days. But a typical sleepy December could awaken again next week.
Same place, different time...
It was around this time last year that the Federal Reserve began indicating more obviously that it would start raising interest rates... Inflation was raging higher and had been for far too long. But Fed Chair Jerome Powell was finally acknowledging it...
Frankly, not a lot of people were paying close attention to what the Fed was saying...
A year later, I sense more folks are thinking about it...
Annual inflation growth is still near 40-year highs, but the monthly pace of inflation has been trending lower since the summer. Now, the Fed is weighing the next steps of its still ongoing interest-rate hikes, and it has indicated it will slow them down.
You would think this would serve as a boon to the stock and bond markets. And recently, as official inflation data has shown signs of cooling, it has. At the same time, recession fears are growing because of the unknows of the "lag effects" of the Fed's moves on the economy.
And there seems to be some disconnect in the markets... Wall Street earnings estimates are still projecting generous growth in 2023 while job cuts are mounting, more folks are putting more everyday spending on credit cards, and incomes aren't keeping up with price increases.
With this as the backdrop, the Fed has its final policy meeting of the year next week on Tuesday and Wednesday in Washington, D.C. On Wednesday afternoon, we will be graced with Powell's presence again to explain the central bank's decision.
The expectation is for a 50-basis-point rate hike. That's still significant, but it's lower than the four straight 75-basis-point hikes we've seen. It would bring the Fed's benchmark lending rate to a range of roughly 4.25% to 4.5%. If anything different than that happens, I'd be surprised.
If it's higher, stock prices could sink... If it's lower, that move should boost them. Traders in the bond market have priced in an 80% likelihood of a 50-point hike, according to the CME Group's FedWatch Tool.
The bigger unknowns...
A few other pieces of information that aren't as widely known or expected could make for some heightened volatility, which could overshadow any jolly rally we might see to close out 2022.
This Fed meeting is one of the four during the year in which the Fed's policy-setting committee projects economic growth, inflation, and unemployment for the next few years.
The last time it did this was in September...
And it resulted in one of the more volatile trading days of the past two years.
As folks digested the projections that the Fed laid out – basically no economic growth, lower inflation and higher unemployment in 2023, and a "terminal" interest rate a full percentage point higher than it previously indicated – the markets gyrated wildly. As we wrote in the September 21, 2022 Digest...
Mr. Market's immediate reaction was to go from a muted positive day to falling hard, fast... The benchmark S&P 500 Index and the tech-heavy Nasdaq Composite Index went from up about 1% before the Fed's policy announcement at 2 p.m. to down 1% just five minutes later.
About 30 minutes after that, Powell started talking in his post-announcement press conference. He said the Fed would start easing rate hikes "at some point" (which now looks like next week). But as we wrote...
In general, Powell gave the impression that the economy is in for tough times over the next year or two, but that inflation far and away is public enemy number one and rates will keep going up to fight it.
In response to a direct question, Powell also didn't rule out a recession – beyond what we may have seen already – saying nobody can know for sure. That's the first time I've heard him say that.
The market didn't want to hear that... After rallying during his initial remarks, once Powell was done talking, the indexes sold off sharply into the close. The S&P 500 and Nasdaq finished down roughly 1.8%, capping a volatile final two hours of trading and adding to recent losses.
I could envision writing something similar to this recap next Wednesday.
In September, the Fed penciled in rising unemployment of 4.4% over the next two years and included the idea that it wouldn't lower rates again until 2024. It also projected a median fed-funds rate of 4.6% in 2023, meaning a long stretch of tougher monetary policy.
Anything that differs significantly from these projections could move the markets...
For instance, a 50-basis-point hike next week would get the fed-funds rate close to its projection for 2023. But if that projection rises, that would indicate additional rate hikes to come.
Plus, Powell always makes remarks that compel market watchers to scratch their heads...
And in the meantime, Fed officials have all but said directly that they will raise rates by 50 percentage points. What they have disagreed on publicly are the steps after that and if or what kind of recession may be coming.
The thoughts will be presented in the Fed's press release around 2 p.m. Eastern time... and Mr. Market's reaction the rest of the day could tell us a lot about the potential strength or weakness of the stock market for the next few weeks and possibly months...
We can't say for sure what will happen, but in 2022, the Fed has been more naughty than nice to stocks. We'll see if the trend breaks soon or results in a sleepy December "neither." If stocks rally off the Fed meeting, that would be a significant bullish development heading into 2023. If not, well... it won't.
The good news is...
No matter what happens, the strategies we've been emphasizing lately – like not all sectors are created equal in this market, or own shares of businesses that generate reams of free cash flow and have pricing power – will not change.
Nobody can know for sure what the economy will ultimately look like in 2023. Yes, we're seeing signs of job openings being eliminated and layoffs happening at businesses that haven't weathered the past year very well. That's concerning.
We're certainly not in a roaring strong economy, but there will be companies that thrive and those that don't in the year ahead. The key is making sure your portfolio is allocated as best as it possibly can be to own the winners and avoid the big losers.
If you missed our Masters Series essays over the weekend, I think Joel Litman, founder of our corporate affiliate Altimetry, offered a good baseline expectation to consider for the new year in Sunday's essay.
He compared today's slowdown with that of the late 1940s, during a similar period of inflation fighting that occurred after World War II. As Joel wrote...
Similar to back then, extreme demand is driving inflation... the Fed is trying to slow that demand down... and balance sheets remain pretty healthy heading into tough times.
Said another way, this downturn is more about the Fed trying to slow spending and lessen demand than it is about borrowers behaving badly.
That means we can expect a sideways equity market for the next two years. While it's not ideal, it's far better than stocks tumbling due to greater economic pain.
As recessions go, that's a silver lining to be grateful for.
Importantly, it also means that some industries still have a ton of upside. There's still plenty of demand for investment in supply chains. And a mild recession won't throw off the U.S.'s position in the global economy. We'll still keep our dominant spot on the world stage.
There's no denying that it's a scary time to be an investor, he said. Doom-and-gloom headlines from the mainstream financial media aren't making things any better. That being said, it's also an exciting time... if you know where to look.
If you want to learn some more about Joel's strategy, click here right now.
Gold Set Up for a Breakout
"The price of gold will rally on a real recession next year," says Chris Mancini, senior analyst at Gabelli Funds. And as he tells our Daniela Cambone, if more Federal Reserve help is on the way, "inflation will take off again."
Click here to watch this episode of The Daniela Cambone Show right now. And to catch all the podcasts and videos from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.
New 52-week highs (as of 12/7/22): General Mills (GIS).
In today's mailbag, feedback on yesterday's Digest and a frequent muse, the Federal Reserve... and thoughts on FTX founder Sam Bankman-Fried... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"I have to admit, my blood pressure went through the roof when I read some of [yesterday's Digest]. Jerome Powell and his cronies think that disposable incomes have gone too far! Really?! It was the despicable wrongheaded moves he and the government printing press [made] that caused this in the first place – so they are going to steal as much money through inflation 'back' from the people who can least afford it.
"These pieces of excrement need to have their salaries cut to zero and put into the till until this situation THEY CREATED is resolved. Hell, go after EVERY DIME they have in the universe. MAKE THEM DESTITUTE for [messing] up so badly.
"Then disband the Fed.
"If it weren't so tragic for the middle class and retirees what these lying, filthy, greedy, incompetent morons have done it would be laughable. My God, how can they say these things publicly and get away with it." – Paid-up subscriber Tom P.
"[On FTX and Sam Bankman-Fried], scamming thousands if not millions out of their hard-earned money is causing stress for many. That punk and his counterpart thieves need to be stripped of all assets and live the remaining of their worthless in jail. Not the white collar jail either." – Paid-up subscriber Bob R.
All the best,
Corey McLaughlin
Baltimore, Maryland
December 8, 2022