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  • Scott Poore, AIF, AWMA, APMA

All I Want For Christmas Is A Santa Rally!

At this rate, I should just rename this blog "Market Musical Musings." This week we take our headline from the holiday hit "All I Want For Christmas Is You." The song was originally co-written and originally performed by Mariah Carey in 1994.

It topped the charts in 26 countries that year and was quickly labeled "one of the few worthy modern additions to the holiday canon" by The New Yorker. At the time, new artists, which is what Carey was labeled, did not put out Christmas songs or albums. Typically, Christmas albums were released by seasoned music artists or artists on the decline. Carey's album, "Miss You Most," and hit song from the same album were a huge commercial success with more than 16 million copies sold (more than any other individual Christmas recording in history).

Just as the song has romantic overtones, investors get very romantic about a year-end Santa Rally. So far this week, it seems we're getting our first taste of a Santa Rally. But, coming on the heels of a selloff due to Omicron and the Fed, the question becomes why now? Here's what we're seeing so far this week...

You're A Mean One Mr. Omicron! When the world first learned of the Omicron variant of COVID during the Thanksgiving holiday, media outlets, world leaders, and investors alike panicked. The fear was that this would be equal to the Delta variant. So far, that does not appear to be the case. Omicron has been identified in more than 38 countries with no resulting deaths (as of this writing). Early data shows Omicron spreading quickly with less severity in cases.

This would be good news that the virus is cycling down in terms of mortality. Here in the U.S., the 7-day average of deaths from COVID are roughly the same over the last 5 weeks (7,154 vs 7,226, or -0.9%). The expectation is that as Omicron spreads in the U.S. and cold winter months keep people indoors, COVID cases will cycle higher. However, if hospitalizations and deaths do not rise substantially, the worst of the pandemic is likely behind us.

Currently, hospitalizations from COVID are running 43% lower than this same time last year. If Omicron stays true to what we are seeing in South Africa, where the variant was first discovered, we would expect hospitalizations to be flat or just slightly higher over the winter months. This seems to be what the market is pricing in - a new variant with far less severe side effects and no real impact on the economy. This is one reason why we're seeing the early signs of a Santa Rally.

As The Shoppers Rush Home With Their Treasures. It's all about the consumer as we head into year-end. Retail sales are well above average. The week of November 30th, Redbook Sales on a year-over-year basis were up 21.9%. This week the number dipped to +15.3%, but still well ahead of previous estimates.

It will be interesting to see if Redbook Sales drop as most shoppers have already planned ahead and acquired their holiday gifts. In the 3 years prior to the pandemic, the sales number peaked during the final week of December, as shoppers waited until the last minute for gifts. That is likely not to be the case this year with the shipping crisis still on-going. Speaking of the shipping crisis, as of Friday, there were 31 container ships at terminal berths and 96 waiting offshore.

That brings the tally to a total of 127 ships at berth or waiting, which is an all-time high. If we compare the current number of ships with those in similar status on November 16th, the backlog was 86 total ships. That's an increase of 47%. If we get a little reprieve in consumer spending in January, likely due to holiday spending "hangover," we could see the number of container ships waiting to be unloaded subside slightly. Should that "hangover" turn into a sustained slump in consumer spending, especially discretionary spending, we could be looking down the barrel of an economic slowdown.

Rockin' Around The Volatility Index. As soon as news broke of the Omicron variant, the volatility index called the "VIX" spiked from a benign reading of 18 and change to 28.6. This was the largest 1-day increase (+54%) since the 27th of January (+61%).

After it became clear that COVID cases had peaked on January 8th of this year, the VIX had dropped 42% within 8 trading days of January 27th. So far, it appears the VIX is on the same pathway as earlier this year. While the VIX continued to make new highs after Thanksgiving as markets tried to determine the severity of Omicron, it has since declined 30% and is now trading around a level of 20.

If the VIX eventually settles back below the 50-day moving average, it's likely the market is headed for smoother sailing until at least January. Market breadth has also increased after plummeting a couple of weeks ago. Just after Thanksgiving, the percent of stocks in the S&P 500 trading above their 50-day moving average was only about 30%. Today, that number is now around 60%. If market breadth stays healthy for the next three weeks, the Santa Rally should be on solid footing.

Baby, It's Cold In January. As we look to prepare our capital market assumptions for 2022, it's not hard to see several headwinds staring us in the face. Number 1 on the list of headwinds is inflation.

Throughout 2021, government officials and media have tried to pretend inflation was only temporary and would head lower. Just recently, much was made of the $0.02 drop in gas prices over Thanksgiving week. That was due primarily to a knee-jerk reaction to Omicron. Since then, gas prices have turned higher and are back just slightly above pre-Thanksgiving highs. Supplies are not likely to improve, whether we're talking about oil or other basic commodities.

This morning's print of November CPI was higher than expected, but not as bad as it could have been. The market was expecting a month-over-month increase of +0.7%, but the number came in at 0.8%. However, October's increase was +0.9%, which if November's number had come in higher than that would have sent markets into a tizzy. Yet, the drivers of inflation in November were broad-based, no matter how you (of the Fed) slice it. Headwind Number 2 on the list is the shipping crisis. We've already touched on this, but if the crisis continues into the latter part of 2022, we could see the U.S. consumer throw in the towel on discretionary purchases as inflation will cause consumers to focus on daily essentials. Shipping and inflation basically go hand-in-hand as they are intertwined. The 3rd Headwind is the labor market.

Employers have been forced to increase pay and, in come cases, benefits for existing workers while also trying to attract new workers. Those costs will likely be passed onto consumers in the form of higher prices. So far, it doesn't seem employers are able to turn the corner. The JOLTS report of Job Openings showed an increase of available jobs close to the highs made earlier this year in September. It also revealed that the number of potential employees that have resigned or quit their jobs remains elevated near highs. Lastly, worker productivity is stretched. The number of hours worked for Q3 rose 7.4%. On top of higher inflation, higher oil, and stress over the pandemic, worker are being asked to work longer hours because employers are having trouble bringing in more help. These headwinds could ultimately determine the results of the market next year.


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