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Charting the Santa Claus Rally That Wasn't

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First off, let’s clear something up right now: the “official” definition of a “Santa Claus Rally” is a stock market catching a bid the week between Christmas and New Year’s Day — in other words: after Christmas, not before. So the rally many analysts had been cheering on as of Fed Chair Jay Powell’s latest public appearance indicating the Fed will begin the process of slowing interest rate hikes was not actually attributed to Santa Claus. It’s more closely aligned to other painful head-fakes investors have been prone to throughout 2022.

From the very start of this year, each market peak has been lower than the last, and each valley has been lower, as well. An air of positive bullishness accentuating the rosiest of possibilities has been routinely slapped down by the realities of persistent inflation and a Fed catching up fighting it with higher interest rates. This latest peak was no different: investors start talking about the Fed stopping and pivoting on interest rates, but in reality these events look to be deep into 2023 from this vista.

Next week, the Federal Open Market Committee (FOMC) reconvenes and will raise interest rates another half-point to put Fed funds over 4% for the first time in 15 years. This will happen a week from today. On Tuesday of next week, we’ll get fresh data on the Consumer Price Index (CPI) for November. Those will be the two largest potential market catalysts, perhaps through the end of the year. If we are to see a bump in market valuations before the end of the year, look toward next week to find it.

That 50 basis-point hike may spur semi-rally all by itself, perhaps to levels we reached mid-last week. Core CPI, year over year, was +7.7% last time around — much better than the 9%+ we’d seen earlier in the year, but still close to 4x higher than what the Fed continues to consider optimum inflation levels. Even core CPI at +6.3% is more than the optimum +2%. However, should another half-point or more be shed from November CPI year-over-year next Tuesday, this might poise markets for a holiday-situated upturn.

Otherwise, we’re now sitting around contemplating our navels and trying to figure out how the Fed lands the inflation plane without bumping (or crashing) into a recession. There’s an old saying: “Idle hands are the devil’s workshop.” Well, the same might be said for idle market participants: it doesn’t take much of an examination of the 2-year and 10-year yield curve inversion — less than 60 bps currently, by the way, a big improvement from early this morning — to start fretting that the inflation plane isn’t going to land safely.

We suggest doing what the weather has been doing over the past month here in Chicago: chill. This rate-hike cycle is already demonstrably in its late stages; we’re going to get where we need to go. There are plenty of reasons to believe if we do settle into a recession it won’t be particularly deep — banks are well situated with capital, industries are well stocked with labor. If the investment environment gets more difficult than it is right now, it will likely still bear a strong resemblance to our condition today.

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