Santa’s rally?  This is what must happen

Santa’s rally? This is what must happen

We are approaching that time of year when the stock market gets into a holiday mood setting off a Santa Claus rally in the new year. With the S&P 500 Index (NYSEARCA:SPY) down (-17%) and the Nasdaq (NASDAQ:QQQ) down a nasty (-29%) for the year, investors should be wondering if markets have the means to organize a Santy Christmas Gathering. The markets’ biggest concern is rising interest rates. The U.S. Federal Reserve will hold its final meeting for the year ending December 14, 2022. It will determine the final interest rate hike and provide commentary and a question-and-answer session detailing its thoughts heading into the ‘next year. Before the rate decision, there are two crucial economic reports and a host of other factors to consider. Here’s what needs to happen for Santa’s gathering to take place. – MarketBeat

The Fed: Grinch or Santa?

Will the US Federal Reserve (Fed) be a hero or a villain at its last Federal Open Market Committee (FOMC) meeting of the year on December 14, 2022? The October CPI report indicated that inflation was down as headline CPI came in at 7.7% against expectations of 7.9%. That sent markets soaring as Wall Street thought it would be enough for the Fed to ease the accelerator pedal and slow its rate hikes. The Fed has confirmed that it is possible to slow rate hikes but that they could last longer than expected. They would rather overshoot rate hikes and then implement rate cuts than underestimate and see inflation rise later. Markets are already pricing in a slowdown to 0.25 to 0.50 rate hikes, not 0.75, to end the year at a target rate of 4% to 4.5% by year end . The decision language is also important as the market expects the Fed to even suspend interest rate hikes in early 2023. This prompted an early rally in the SPY and QQQs in December. . The next two key economic reports are scheduled before the final FOMC meeting.

Report on the work

The first of two remaining critical economic reports is the U.S. Bureau of Labor Statistics (BLS)’s State of Employment Report (aka Jobs Report) for December 2, 2022. Incidentally, the Jobs Report October is actually stronger at 263,000 than the 205,000 expected, indicating a still strong job market, but unemployment rose to 3.7%. The job growth rate actually slowed to its lowest level in two years. This should still have driven the markets lower, but they actually rose on the report. November’s jobs report may actually fall short of expectations with high-profile layoffs at Twitter of over 3,500 jobs, Meta Platforms (NASDAQ:META) of over 11,000 workers and nearly 10,000 workers at Amazon (NASDAQ: AMZN), Cisco Systems (NASDAQ: CSCO) by 4,000 workers, Lyft (NASDAQ: LYFT) by 700 workers and a Disney (NYSE: DIS) hiring freeze.

CPI report

The most important economic report before the FOMC is the Consumer Price Index (CPI) report for December 13, 2022 at 8:30 a.m. EST, the day before the FOMC rate decision. This is the inflation gauge. The latest October 2022 report surprised markets by coming in at 7.7% vs. 7.9% expected, indicating the weakest inflation since January 2022. It was this report that sparked the rally in December . The next CPI report, which will be a reading for the previous November, is expected to come in at 7.6%. It’s the line in the sand. If the CPI is below 7.6%, markets should rally. The magnitude of the rally depends on how far below 7.6% the figure actually lies. On the other hand, if the CPI is above 7.6%, markets could likely sell off unless the report is written in dovish language.

Sell ​​the news?

There is another caveat to consider. Since markets are forward-thinking, they often like to anticipate an event in advance, which has the opposite effect later. This is often coined as “Buy the rumour, sell the news”. If markets expect the Fed to slow rate hikes due to lower inflation, as is currently the case, then markets may actually rally ahead of the FOMC meeting. If the market rallies too strongly before the rate decision, it may actually sell off despite the rate decision. It is prudent to give him until the next day’s reaction to assess whether the market will follow up. Since the Fed’s decision is in the middle of the month, this still leaves plenty of time for a Santa Claus rally to occur since it usually takes place towards the end of the month and year. It is prudent to have a shopping list ready in case it happens this year.

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