After a good year for the market we seem to be ending on a sour note, as the market has been mostly down this month going into the last week of trading. Will it continue, or will we have a Santa rally? Only time will tell, but my money is on Santa pulling through.
It has been an odd year for markets. We began with great optimism as we were rapidly recovering from our reaction to the pandemic…then we hit the brakes. With an evenly split Congress, this administration somehow believed they had a mandate to be the most progressive in history. What people had asked for was an administration that would stay off of Twitter, be polite, and return to normalcy. We were literally sick and tired of big and bold; we wanted small and competent. That isn’t what we got.
The result is a supply chain nightmare and the highest inflation we have seen in nearly 40 years. In the stock market we began the year with value stocks and small company stocks leading the way after a lost decade; as GDP growth slowed this trend reversed, at least temporarily.
We have had a year without an official 10 percent correction, yet 98 percent of the S&P 500 companies have been down 10 percent or more at some point. Rotation has kept the index itself up. Other areas have corrected, including small company stocks.
We have recently been stuck in a range going up and down and up again. The latest leg has been down. Most of this simply seems like the investors are done for the year. This is not a commentary on 2022; it is simply a function of the market. Mutual funds are paying out significant capital gains after the market has rallied from the pandemic lows in the Spring of 2020. They must raise cash to do so, and this is forced trading. What losses investors have need to be realized by year-end to offset some of the last 18 months of gain.
This is what seems to be driving the market down, not any pessimistic view. As a result, one would think Santa is still coming. The market has gone down, now it is time to go back up. The real direction is flat. How will that change in 2022? I think we just have to wait and see, which is apparently what most other investors are doing.
Meanwhile, I know in my house, and I hope in yours, Santa is coming. Merry Christmas and Happy New Year!
Chuck Osborne, CFA