Santa Claus Rally 2022?

Markets were up last week in an abbreviated trading week (see chart below).



As we close November and ring in December, the debate among investors is whether we get a classical year-end “Santa Claus” rally. While a year-end rally has been reliable in the last many years, this year has been full of surprises. Consequently, the debate around this one is rancorous.

Could markets rally into year end? Sure. Earnings season is over, and the results were reasonably strong (see last week’s note). There will likely not be significant macro data surprises in the next month. Expectations are for the Fed to raise the Fed Funds rate by 50 basis points and for inflation to continue receding. Labor markets and employment remain robust. If things largely progress along these expectational lines, then a year-end rally seems plausible if not probable.

On the other hand, the yield curve is deeply inverted suggesting a high probability of recession in 2023. Additionally, stock valuations are still on the expensive side while forward earnings expectations are coming down. On top of this, there is burgeoning unrest in China and the war in Ukraine could lead to innumerable deeply negative outcomes. We could see further market declines into the year-end as investors begin to digest this more sobering reality. There are many factors that could potentially lead the market “zeitgeist” to tip toward bearishness in the next month.

For most investors, this is mostly just noise. Whether a December rally occurs or not, it is wise to keep the long-term in mind. What is your investment horizon and what is your risk tolerance? Is your portfolio appropriately positioned considering these things? As always, we advise having a conversation with your advisor if you are uncertain about whether your portfolio is correctly positioned to help you meet your goals. We are here to help you.





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