Markets Aren't Exactly What They Seem
Markets have been hit with a lot to digest lately. The Friday of Thanksgiving week the Omicron variant of COVID was publicized. On Tuesday of last week the Fed acknowledged that inflation is not "transitory" and that Tapering might speed up. On top of that, we are in the middle of mutual fund rebalancing season. Some investors may be unaware of the mechanics of mutual funds. But, by law, mutual funds must pay out to shareholders any gains that were recognized during the year, and most mutual funds have plentiful gains in 2021. As a result, in order to pay out those gains to shareholders, they will typically rebalance their portfolios in order to generate cash for the payout and to reposition certain holdings. This all adds up to the perfect storm for the first couple of weeks of December. However, there are silver linings that lead us to believe a "Santa Rally" may be on the horizon.
Going back to 1950, December is usually a very strong month for the S&P 500 as equity investors get multiple metrics on holiday spending and that tends to fuel stocks. Historically (as shown in the chart below) the middle of December is when stocks really begin to out-perform heading into New Year's Day. The silver linings involve Omicron & holiday sales. While Omicron is spreading quickly, according to the World Health Organization, not one death worldwide has been attributed to the new variant. This may signal the end to the pandemic as there will likely be more variants, but the deadly nature of the virus is waning. Holiday sales are currently tracking 11-12% above last year's number. This speaks to the health of the U.S. consumer. This should set up markets to out-perform in the latter half of December, barring some unforeseen global event.
Last week the economic data was mixed. The ADP jobs report was solid, coming in at +534,000 jobs, as opposed to 525,000 expected. However, the government's jobs report on Friday showed only 210,000 new jobs added, well below the 550,000 expected and clearly lower than the ADP report. Time will tell if the numbers are eventually revised higher, but according to Goldman Sachs, the seasonal adjustment factor was likely skewed as the response to the survey in November was the lowest in 13 years. The Unemployment rate dipped from 4.6% in October to 4.2% in November. Elsewhere, Redbook Sales, as measured by over 9,000 retailers, showed that year-over-year same-store sales are up 21.9%. This further adds to the potential success of this year's holiday sales. The ISM Manufacturing index came in higher than expected and great than last month's reading. However, Consumer Confidence, as measured by the Conference Board dipped to a 7-month low. Vehicle Sales were lower than expected as semiconductor chips still haven't returned to normal production / shipping.
The big economic release this week could affect the outlook for 2022. On Friday, we'll get the first look at November inflation with the Consumer Price Index (CPI). The market is expecting November's growth rate to have eased from October. The month-over-month CPI in October was +0.9%, and the market is expecting November's reading to be +0.7%. The market would likely cheer that number or lower. However, if we get a larger print, it could give the market fits. Next year, if inflation does not slow, real equity returns (adjusted for inflation) could start to decline on a year-over-year basis. This is something we will be closely watching as we head into 2022.