By John Lau
November 30, 2022 – In this month’s issue, I want to examine the five catalysts that could trigger a substantial year-end “Santa Claus rally”, and lay out two possible scenarios for markets:
- First, a Santa Claus rally that sees the S&P 500 rally into year-end.
- Second, the end of yet another bear market rally that results in the S&P 500 testing the recent lows or even making fresh lows.
To do this, I have identified the five catalysts that could substantially move markets over the next few months:
- Inflation
- Terminal Fed Funds
- Economic growth
- China re-opening
- Russia/Ukraine war
Inflation: There has been more evidence of disinflation in recent weeks, starting with October’s CPI report released by the Bureau of Labor Statistics at 7.70%, comparing to September’s 8.20%. German CPI also declined -0.5% vs. (E) -0.2% month-over-month, and rose “only” 10.0% vs. (E) 10.4% year-over-year, while Spain’s CPI rose 6.60% vs. (E) 7.30% year-over-year (Spain has not been as impacted by surging energy costs as Germany has, so their inflation has been less severe).
The Fed will pivot long before CPI gets to its target 2%. At what point of CPI the Fed pivots will depend on how confident it is that inflation is trending decidedly lower. Global disinflation will make the Fed more confident earlier than if just U.S. CPI stats are falling. So, falling inflation stats globally are a general positive for all risk assets (including U.S. stocks and bonds).
Terminal Fed Funds: The current Fed Funds rate is 3.875%. With the current December 50-bps rate hike expectation, the rate will increase to 4.375%. Depending on how much the Fed will raise in February and possibly again in March, the Fed Fund expectation by the end of Q-1/2023 is 4.875%-5.125%, with the average being 5.0%. This is the rate at which the Fed is expected to stop hiking rates. Then, the attention will shift from Fed watch to the economy and earning-multiples. Fed Chair Powell knows the market’s expectation for the terminal rate is 5.00%. If he again says expectations are too low, it will be a clear signal to markets that terminal rate expectations must go above 5.00%, and that will be a clear negative for stocks and bonds as Powell again dashes any growing hopes for a Fed pivot. If Powell does not say the terminal rate may be higher than current expectations, then that would be taken by the market as a quasi-endorsement of a 5% (or lower) terminal fed funds rate. A solid rally should ensue.
Economic Growth: A key variable to watch is the ISM Composite Index, which includes the ISM Manufacturing Index and the ISM Service Price Index. If both indices drop below 50, that would be a bad economic signal, which means the economy is rolling over and the risk of stagflation rises (negative for markets). October’s Manufacturing Index is at 46.6, while the Services Prices Paid Index is still at an elevated level: 70.7. This means while goods prices have decelerated, the labor market still needs to soften (“rebalance”) while wages are still well above levels consistent with 2% inflation over time.
China’s reopening: Over the past few weeks, Chinese officials have signaled there will be substantive changes to Covid policies, including: 1) More targeted lockdowns that don’t paralyze entire cities, shorter quarantine times for international travelers, importation of MRNA Covid vaccines, among others. While there won’t be a clear declaration that China will abandon “Zero Covid”, clearly a process has begun to move away from that policy, although it will take time for the Chinese economy to return to a pre-Covid normal. Bottom Line: The process has started.
In addition to China Covid cases dropping, Chinese PMIs need to rise back above 50 (currently at 48.00, down from 49.20 last month and down from 50.10 a year ago[1]). And the yuan needs to move back towards (and below) 6.50 to the dollar (currently around 7.09[2] to the dollar).
Russia/Ukraine War: There are no indicators to watch, and instead we would just need to look for outcomes.
- Positive outcome: cease fire negotiations begin before year-end maybe with a “Korea-like” cease fire agreement.
- Negative outcome: Russia detonates a tactical nuclear bomb or other advanced weaponry like an EMP (electromagnetic pulse/transformer).
Whether there will be a Santa Claus Rally or a Market pullback, we at Robertson Stephens will be watching the indicators carefully and will follow our Santa Rally or Pullback playbook and adapt accordingly.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are only available to qualified investors and are not suitable for all investors. Alternative investments include risks such as illiquidity, long time horizons, reduced transparency, and significant loss of principal. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2022 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
[1] YCharts
[2] www.xe.com>currencyconverter
Will There Be a Santa Claus Rally?
By John Lau
November 30, 2022 – In this month’s issue, I want to examine the five catalysts that could trigger a substantial year-end “Santa Claus rally”, and lay out two possible scenarios for markets:
To do this, I have identified the five catalysts that could substantially move markets over the next few months:
Inflation: There has been more evidence of disinflation in recent weeks, starting with October’s CPI report released by the Bureau of Labor Statistics at 7.70%, comparing to September’s 8.20%. German CPI also declined -0.5% vs. (E) -0.2% month-over-month, and rose “only” 10.0% vs. (E) 10.4% year-over-year, while Spain’s CPI rose 6.60% vs. (E) 7.30% year-over-year (Spain has not been as impacted by surging energy costs as Germany has, so their inflation has been less severe).
The Fed will pivot long before CPI gets to its target 2%. At what point of CPI the Fed pivots will depend on how confident it is that inflation is trending decidedly lower. Global disinflation will make the Fed more confident earlier than if just U.S. CPI stats are falling. So, falling inflation stats globally are a general positive for all risk assets (including U.S. stocks and bonds).
Terminal Fed Funds: The current Fed Funds rate is 3.875%. With the current December 50-bps rate hike expectation, the rate will increase to 4.375%. Depending on how much the Fed will raise in February and possibly again in March, the Fed Fund expectation by the end of Q-1/2023 is 4.875%-5.125%, with the average being 5.0%. This is the rate at which the Fed is expected to stop hiking rates. Then, the attention will shift from Fed watch to the economy and earning-multiples. Fed Chair Powell knows the market’s expectation for the terminal rate is 5.00%. If he again says expectations are too low, it will be a clear signal to markets that terminal rate expectations must go above 5.00%, and that will be a clear negative for stocks and bonds as Powell again dashes any growing hopes for a Fed pivot. If Powell does not say the terminal rate may be higher than current expectations, then that would be taken by the market as a quasi-endorsement of a 5% (or lower) terminal fed funds rate. A solid rally should ensue.
Economic Growth: A key variable to watch is the ISM Composite Index, which includes the ISM Manufacturing Index and the ISM Service Price Index. If both indices drop below 50, that would be a bad economic signal, which means the economy is rolling over and the risk of stagflation rises (negative for markets). October’s Manufacturing Index is at 46.6, while the Services Prices Paid Index is still at an elevated level: 70.7. This means while goods prices have decelerated, the labor market still needs to soften (“rebalance”) while wages are still well above levels consistent with 2% inflation over time.
China’s reopening: Over the past few weeks, Chinese officials have signaled there will be substantive changes to Covid policies, including: 1) More targeted lockdowns that don’t paralyze entire cities, shorter quarantine times for international travelers, importation of MRNA Covid vaccines, among others. While there won’t be a clear declaration that China will abandon “Zero Covid”, clearly a process has begun to move away from that policy, although it will take time for the Chinese economy to return to a pre-Covid normal. Bottom Line: The process has started.
In addition to China Covid cases dropping, Chinese PMIs need to rise back above 50 (currently at 48.00, down from 49.20 last month and down from 50.10 a year ago[1]). And the yuan needs to move back towards (and below) 6.50 to the dollar (currently around 7.09[2] to the dollar).
Russia/Ukraine War: There are no indicators to watch, and instead we would just need to look for outcomes.
Whether there will be a Santa Claus Rally or a Market pullback, we at Robertson Stephens will be watching the indicators carefully and will follow our Santa Rally or Pullback playbook and adapt accordingly.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are only available to qualified investors and are not suitable for all investors. Alternative investments include risks such as illiquidity, long time horizons, reduced transparency, and significant loss of principal. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2022 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
[1] YCharts
[2] www.xe.com>currencyconverter
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