Where is Santa?

Still up on the roof?

The Santa rally is usually confined to the period between Christmas and the New Year as year-end window dressing results in more buying of the year’s best performers or in the case of 2018 the relief rally after the Fed pivot which arrested the steep December falls that year.

2022 has seen significant falls in equities (and bonds) across the board so no window dressing, in fact it is more likely that the modus operandi will be to “kitchen sink” it. In other words, our numbers are going to be poor so let’s get rid of anything that might draw attention to stocks that have dragged our performance down and/or take profits on stocks where we still have profits (potentially not good news for large cap tech).

After the falls last week, we may get a small bounce into Christmas, but then the selling is likely to resume as market participants in both the US and Europe digest the message coming from their respective central bankers that rates will continue to rise and there will be no pivot (ie a cut in rates) in 2023. Powell couldn’t have been more explicit.

The committee decided to raise interest rates by 50 bps… and we still have some ways to go”

“We are taking forceful steps to moderate demand so that it comes into better alignment with supply”

“Reducing inflation is likely to require a sustained period of below trend growth”

“We will stay the course until the job is done”

“Our Focus is not on rate cuts or prematurely loosening policy”

“We’re going into next year with higher inflation than we thought”

Over in Europe the ECB’s Lagarde was equally emphatic.

Based on the information that we have available today, that predicates another 50-basis-point rate hike at our next meeting, and possibly at the one after that, and possibly thereafter,

But everything will also be determined by the review of data.

So don’t assume that it’s a one-shot 50; it’s more than that.

Anybody who thinks that this is a pivot for the ECB is wrong

Falling inflation allied with a recessionary economy, ie falling growth, has not been a panacea for the stock market historically, in fact quite the reverse. What concerns the central banks is that inflation won’t slow quickly enough and they worry that loosening monetary policy too soon will cause it to ratchet back up again. Hence the hawkish rhetoric the markets would rather not hear.

Technically the downside targets on the S&P are at 3500 then 3275, but we could see the big figure turning into a two before we get a rally presaged by a slowing or halt in interest rate rises. NB there will be no pivot or QE unless something breaks; the most likely candidate being the bond market; Italian BTPs, Japanese JGBs, Gilts or USTs take your pick.

In the immortal words of fund manager Cullen Roche, “The stock market is the only market where things go on sale and the customers run out of the store.”

Then we’ll get a rally and a half! Potentially, 2023 will be a year of great opportunity. The View from the Bridge is looking forward to being bullish!

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