Traders work on the ground of the New York Stock Exchange (NYSE) in New York City, December 8, 2021.
Brendan McDermid | Reuters
Stocks may be unstable in the coming week, with skinny quantity exaggerating strikes in each instructions forward of the Christmas holiday.
The market was whipsawed in the previous week, with the Nasdaq down about 2.9% since Monday and lagging the different main averages on a weekly foundation. Technology shares had been at the middle of main market swings, as investors reacted to the spreading omicron Covid variant and the Federal Reserve’s hawkish shift.
“As we head into the last two weeks of the year, we know volume is light and volatility can also pick up,” mentioned Jeff Kleintop, chief world funding strategist at Charles Schwab. “There’s the possibility of a Santa rally, but there’s also the possibility that the lack of volume can lead to dramatic swings to the downside as well.”
While December is often constructive for shares, the conventional Santa Claus rally is the traditionally constructive market efficiency that always comes in the final 5 buying and selling days of the yr and first two of January, in response to Stock Trader’s Almanac. As the saying goes, if Santa would not name, bears may come to Broad and Wall — the avenue deal with of the New York Stock Exchange.
A thinner market close to the finish of the yr
“The Santa Claus rally this year is a little tough to call because the market has done so well up to this point. Building on that momentum is a bold call,” said Michael Arone, chief investment strategist at State Street Global Advisors. “Volumes are going to decrease, and that’s likely to lead to greater volatility into year end. It wouldn’t surprise me if markets close the year strongly, but with the omicron variant and the Fed tightening, it just seems anxiety is at high levels.”
Strategists haven’t given up on the idea of a late December to early January rally. However, with the selling pressure, it could be more difficult for the seasonal year-end buyers to boost the market. The thinness of the market may also make it tricky to gauge how stocks will trade into January.
“I think it’s going to be hard to get a real tell on the market — the light volume and the fact there’s going to be relatively little economic news or corporate news. It’s going to be just incremental news on omicron,” said Kleintop.
He said earnings in the past year has been a catalyst for stocks, with companies beating estimates and raising guidance. That could turn the tide in the next earnings season in mid-January, if stocks continue to move lower.
“This time we might get a lot of dividend increases. There’s a lot of cash out there,” he said. Kleintop said expectations are for just an 8% gain in corporate profits in 2022, and that could move higher since companies appear to be managing margins better than expected.
In the week ahead, there are several economic releases to watch. The markets will be most fixated on personal consumption expenditures subsequent Thursday, as the so-called PCE deflator is the inflation knowledge most watched by the Federal Reserve. The report follows November’s scorching shopper worth index, which was up 6.8% on a year-over-year foundation.
Arone mentioned the market may even monitor the consumer confidence index release subsequent Wednesday for inflation expectations. The University of Michigan’s consumer sentiment index is out Thursday.
Key actual property indicators are additionally out subsequent week, with current dwelling gross sales on Wednesday and new dwelling gross sales Thursday. Durable items are additionally out Thursday.
The market is closed for the Christmas holiday on Friday.
Bond market confusion
As shares gyrated, bond yields went down in the previous week, particularly after the Fed introduced Dec. 15 that it might velocity up the finish of its bond-buying. The central financial institution additionally offered a new rate of interest forecast which confirmed members anticipate as many as three hikes subsequent yr, when beforehand they didn’t forecast any.
The Fed additionally eliminated the description of inflation as “transitory” from its assertion.
Bond yields transfer reverse worth, so the transfer decrease in charges was shocking to market professionals. It would be logical to have anticipated a leap in yields at the shorter finish of the market, which is most affected by Fed coverage. For occasion, the 2-year Treasury yield was at 0.64% Friday afternoon, beneath the 0.67% degree it was at forward of the Fed information.
The benchmark 10-year yield was at 1.44% earlier than the Fed’s announcement. It had fallen to 1.37% by Friday morning and was at round 1.41% in afternoon buying and selling.
Yields initially inched larger Friday afternoon after Fed Governor Christopher Waller mentioned the central financial institution may increase rates of interest as early as March. Goldman Sachs economists had been anticipating a March hike, however most anticipated the Fed to attend till May or June as a result of it is going to finish its bond program in March.
“I do think the omicron scare has got people spooked. On the long end, it’s weighing on it,” mentioned Wells Fargo’s Michael Schumacher. “The front end doesn’t make a lot of sense. We just heard from the Fed… The front end should really be taking its marching orders from Powell.”
While the Fed and the Bank of England have lately moved to tighten coverage, one other financial superpower may be doing the reverse.
Schumacher and Kleintop mentioned a constructive shock for markets may come from China forward of Monday’s buying and selling.
“On Monday, we’ll all be watching China with what they do with their loan prime rate. There’s a chance they could cut it,” Kleintop mentioned.
“If China is going to re-inflate their economy, that would be a real boost to global growth,” he mentioned.
What to do
Kleintop mentioned investors ought to keep absolutely invested. He famous that due to the massive rotations in market management this yr, investors ought to be extra diversified.
“Every time we started to see a breakout with value, it was crushed with another virus outbreak. We should be seeing growth stocks outperform here, as cases rise, but they haven’t made a new high relative to value since the news of omicron,” mentioned Kleintop.
Kleintop famous that the tech sector is very valued, with its price-earnings ratios 10 factors above the 20-year common. The ahead price-earnings for world tech was 28.5 Friday. He mentioned that compares to the world power sector, buying and selling on a 12-month ahead price-earnings ratio of 9.5, about 9 factors beneath its common.
“This is the widest gap we’ve seen between the growthiest of the growth and the value sectors,” Kleintop mentioned. “We haven’t seen tech make a new high relative to energy since before omicron. Certainly, there’s the Fed weighing on valuations as well as there’s the idea there’s going to be less liquidity pouring into these favorite stocks.”
Kleintop mentioned he doesn’t see a massive achieve for the market in 2022, like this yr, and investors ought to look overseas for some higher positive factors.
“We see a positive year for equities but nothing like this year,” he mentioned. “There’s a potential outperformance by Europe and international next year, after they underperformed.”
Week forward calendar
10:00 a.m. Leading indicators
8:30 a.m. Third-quarter GDP
10:00 a.m. Consumer confidence
10:00 a.m. Existing dwelling gross sales
8:30 a.m. Jobless claims
8:30 a.m. Durable items
8:30 a.m. Personal revenue/spending
8:30 a.m. PCE deflator
10:00 a.m. New dwelling gross sales
10:00 a.m. Consumer sentiment
Markets closed for Christmas holiday