Markets Are Seemingly “Climbing the Wall of Worry”

Markets rallied mid-week in response to remarks made on Wednesday by Federal Reserve Board of Governors Chairman Jerome Powell, raising hopes that inflation is receding and that most of the rate increases are behind us. Below is a graph for the week just passed depicting the price performance of popular US stock market indices. You can see the price spike on Wednesday after the speech. At this stage, it would appear the anticipated Santa Claus rally is underway even as a record bearishness pervades Wall Street sentiment.



As December continues to unfold, here are the five big factors likely to affect stock prices for the remainder of the year:


1. Inflation and Interest Rates

Expectations are for the Fed to raise 50 basis points this month and continuing to position that rate increases will dissipate as inflation dissipates. This scenario is now fully priced in our view.

2. Employment and Layoff Announcements

Employment conditions are expected to continue with some companies announcing some layoffs; but with the employment picture in aggregate remaining robust. Hence consumers are likely to continue spending. The holiday shopping season is likely to be good in our view.

3. Recession and Earnings Outlooks

While the yield curve is indicating recession at some future point, with earnings season behind us, these types of issues are likely to remain quiescent in December. We don’t see recessionary worries or earnings guidance to provide any kind of market scare this month.

4. Corporate Stock Buybacks

This is a bit of an unknown in terms of when the buying occurs; but has been a real force in stock performance over the past several years. Companies continue to announce substantial increases to their buyback programs. This can be a tailwind for markets and could be one reason behind advancing markets since October.

5. Geopolitics

This is probably the one factor that can derail the rally this month. It’s such a wild card that nothing can be said in terms of probability. Nonetheless, with protests in response to Covid lockdowns in China and the potential powder keg of Putin’s war with Ukraine, bad things can happen leading to market destabilization, particularly related to energy supply and demand in Europe. Neither is likely to result in some market turbulence in December, but both are worth keeping an eye on.

So where does all this leave us?

It leaves us with plenty to worry about but probably nothing that will manifest, and derail markets this month. Can we go higher? Probably a bit; but there are things that will likely result in only modest gains. Mainly, stock valuations are still quite high and uncertainties about the future remain elevated. It may be that we collectively awaken on January 1st with a more sober outlook. But, in the meantime, enjoy the holiday season.



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