Everyone knows about the Santa rally effect, and it is particularly pronounced in a bull market. The Bank of America said that the November-to-January period is the strongest three-month period of the year for S&P 500 returns, and even more so when August-to-October is above-average, which was this year with a 4.8% gain.
The market isn't showing a lot of festive cheer, especially if you look at the bottom 495 stocks of the S&P 500 and small-caps. The S&P 500 equal weight index SP 500 EW is down 1% from its highs, while the Russell 2000 RUT is down 4%. After the strong gains for the year, that is hardly bad, but it is a sign that the market is at least consolidating.
Sean Darby is a global equity strategist at Jefferies, who says an extended period of flows into risky assets has crested as the dollar firms, LIBOR cuts through its moving average, currency volatility breaks out, and the yield curve is unnervingly flat while inflation expectations remain elevated.
As it commenced, soon-to-be-outgoing Fed Vice Chair Richard Clarida opened the door to speeding up the tapering process in December. The dollar is beginning to reprice all global asset classes and this should be accompanied by higher volatility as expected returns become more uncertain, said Darby in a note to clients.
In a Monday interview with CNBC, he elaborated on that pessimism. He said that you could have a significant change in sentiment if you only have small changes in expectations of growth or policy tightening. That doesn't mean there won't be an unhappy fourth quarter, according to Darby, but it's a pretty difficult time for the first quarter of 2022, he said. This could be the week when President Joe Biden decides whether Jerome Powell or Lael Brainard will be his nominee for Fed chair. The White House schedule has Biden talking about the economy and lowering prices for the American people on Tuesday, which sounds like a topical subject line for discussion of the central bank's leadership. Biden made positive comments about Powell in a meeting with centrist senators, according to the Washington Post.
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The emailed version will be sent at around 7: 30 a.m. Eastern.