Posted by cai vườn (136..98.176) on December 09, 2022 at 09:51:59:
At this time of year, those like myself who write about markets are prone to talking about something known as a “Santa Claus Rally,” the tendency of stocks to perform well from year's end through the beginning of the new year. Nobody is sure why this happens, but it has been a relatively reliable phenomenon for long enough to be real. This year, Santa's magic will have to be very strong to overcome what hit the wire this morning.
Over the last couple of months, the S&P 500 has rallied strongly after hitting a low of 3491.58 on October 13. That rally has been based on a belief or hope that the Fed will at least slow the pace of rate hikes at the beginning of next year, if not actually halt them altogether. That has been considered possible because there have been some signs that inflation is slowing.
However, this morning’s Producer Price Index (PPI) data, produced by the Bureau of Labor Statistics (BLS), dealt a serious blow to that optimism. According to the report, wholesale prices rose by 0.3% last month. That is more than anticipated by economists and traders, and represents annual input price inflation of 7.4%.
Producer prices are not directly tied to the Consumer Price Index (CPI) that will be released soon but if anything, the relationship between them is what makes this morning’s data so worrying. They are a leading indicator of retail prices, so a greater than expected increase in raw material costs this month will factor into calculations of what to expect next month and beyond. The one saving grace from this morning’s numbers though, is that within the overall calculation, there was significant volatility in individual classes of goods.
Vegetable prices, for example, jumped 38%, but the more impactful energy costs fell by 3.3%. That would suggest that the surprise number could be seasonal and not an indication of a trend, but until we see a couple more PPI reports, we cannot assume that. As we approach the last few trading days of this year and the first few of next year, the period when Santa usually puts a smile on the faces of investors, it seems like his sack may be filled with coal.
That will certainly be the case if one of the theories about what causes Santa Claus is true. If, as some believe, it is a result of just general holiday spirits and a natural inclination towards optimism as we look forward to a new year, those spirits will be completely dampened by this report. If on the other hand, Santa Claus rallies are about something more prosaic, then we will see one this year regardless of the numbers. The theory of what causes year-end rallies that I prefer is a less spiritual, more practical one.
Having met a lot of traders in my time, I find it hard to think of them as a group filled with optimism and holiday cheer. It makes more sense to me that stocks rally late in December because that it is a time when big institutional funds and investors rebalance their portfolios. If that is right, then circumstances dictate that we will see such a rally this year.
With every major index down significantly on the year, rebalancing for most funds will be about buying stocks. If you, as a big fund, started the year at your target allocation of say seventy percent of your portfolio in stocks and did little or nothing during the year, that allocation would now be down to around 58% based on a 17% decline in the S&P 500 year to date. That means that you have to buy stocks that equate to 12% of your fund’s total asset value to get back to your target allocation. 12% may not sound like a lot, but it means that the billions, if not trillions, of dollars held in such funds translates to a lot of buying power.
Despite the best efforts of the Grinch-like PPI numbers, it could well be that Santa Claus will still come this year for traders and a year-end rally will materialize, no matter what the numbers say.