US stocks have rebounded from their 2022 lows. Now, with December approaching, many are now fancying their chances of a Santa Claus rally this year. Here’s what experts say about the possibility of a Santa Claus rally this year.
We’ve seen some divergence in US stocks amid the bounce back. While the wider markets have recovered, a lot of tech names including FAANG peers have lacked strength. The US economic data has also been mixed. However, markets now expect the Fed to slow down the pace of its rate hikes from December.
To be sure, so far in 2022, hopes of a dovish Fed have not materialized. Fed chair Jerome Powell has cautioned on more than one occasion that an early end to the tightening cycle might not be a prudent strategy.
However, the minutes of the Fed’s November meeting have yet again ignited hopes that the US central bank would finally bite the bullet and at least reduce the quantum of rate hikes.
The Next Fed Meeting is Scheduled for December
The Fed’s November meeting minutes which were released earlier this week stated, “A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.” They added, “A slower pace in these circumstances would better allow the Committee to assess progress toward its goals of maximum employment and price stability.”
The next FOMC meeting is scheduled on December 13-14 and many see it as a key event that would either lead to or dampen a Santa Claus rally.
Would the Fed Play Santa Claus in 2022?
To be sure, the Fed has been far from a Santa Claus for markets this year. On multiple occasions, Powell has dashed hopes of a Fed pivot. After the November FOMC meeting, Powell said, “The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive.”
However, the minutes of the November meeting showed that FOMC members acknowledge the lag impact of its monetary policy action. Several leading economic indicators are flashing a warning sign for the US economy and many economists see a recession next year, albeit a shallow one.
Powell has maintained that Fed’s rate hikes might lead to a recession but emphasized that the Fed is not trying to force one. While recession impacts most sectors of the economy, some of the investments are largely recession-proof.
Jim Cramer Predicts a Santa Claus Rally in December
Jim Cramer is among those who are backing the idea of a Santa Claus rally this year. He said, “The charts, as interpreted by the legendary Larry Williams, suggest that the Santa Claus rally is coming to town next month and you’ve got to get ready for it, or else you may be left behind.”
Meanwhile, markets expect the Fed to raise rates by 50 basis points in December as well as February. The current Fed funds rates if 3.75-4% after six consecutive rate hikes this year. Another 100-basis point rate hike would take the rates to 5%, the highest in years.
That said, along with the quantum of rate hikes, markets are now interested in how long the Fed maintains rates at higher levels before an eventual pivot to rate cuts. While many analysts see a Santa Claus rally in 2022, they see US stocks staying weak in the course of 2023 amid higher interest rates.
Morgan Stanley also believes that the US stock markets would bottom in the first quarter of 2023 and said that the S&P 500 should fall to the “low 3,000s.” However, Mike Wilson, Morgan Stanley’s Chief US Equity Strategist said that the crash would be a good buying opportunity.
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