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Thursday, January 20, 2022

What December has in Store for Investors

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Snow covered Wall Street sign
Credit: Brendan McDermid – Reuters / stock.adobe.com

In reality, the calendar should not affect markets. What day of the month or year it is shouldn’t impact traders’ decisions beyond maybe some tax considerations, but the ends of months, quarters and years do provide an opportunity to step back a bit, and look away from the hourly and daily moves that dominate one’s view. Doing that right now, as we enter the last month of the year, is particularly useful.

Over the last few days, the omicron variant of Covid-19 has dominated the news. It has been given a name reminiscent of a Marvel villain, which makes it sound ominous and has maybe increased the reaction. More seriously and consequentially, there are fears that it will prove to be more transmissible than other variants and more resistant to vaccines. As of now, these are just fears. It is too early to draw any firm conclusions about the nature of omicron or its potential impact, but fear can still drive markets.

However, even if we assume that fear will fade, as it always does, there are reasons to believe that December will be, at best, a bumpy ride for stock investors. The first of those is the chart for S&P 500 futures:

ES mini futures

I am using the E-Mini futures contract (ES) here so as to include this morning’s drop, but even with that, the last few days action looks a lot less significant than it feels right now when looked at in the context of a strong year for stocks. How you view the drop, of course, depends on how you frame the news. You could say that it has wiped out a month of gains, in which case it sounds dire, or that it is only a three percent retracement, with ninety percent of the year’s gains still intact. Either way, what is hard to deny when you look at the 1-year chart is that we were due a pullback.

Even though the last year has seen spectacular gains of over thirty percent in the S&P, there have been, as there always are, down periods within that long-term move. Logically and statistically speaking, the chances are that this will prove to be just another bump along the road, but there are a few things that could give legs to the down move, or at least delay a bounce back.

The first is the now ritual political stupidity of the threat of a government shutdown. That will come if Congress doesn’t pass something on the budget by this Friday. As of now, it looks likely that that will happen, but with the progressive wing of the Democratic Party now joining Republicans in using the threat of a shutdown to object to some policies, it is not certain.

Once that piece of political theater concludes, we move on to the next act, the even more ridiculous fight over the debt ceiling. The fact that any politician would put the credit of the United States and the entire global financial system at risk by threatening a default on government debt is, when you think about it, quite stunning, but it is something that we have become used to when Republicans are in opposition. The impact on the markets may be reduced somewhat given how many times the threat has been used and has come to nothing, but the brinkmanship could prove destabilizing, nonetheless.

Beyond politics, there is the possible impact of the Fed. With Jerome Powell having been re-appointed by Biden, we can expect more of the dovish tone that has marked his Chairmanship so far. Certainly, that is evident in his already saying that omicron, even at this early stage, may damage the economy and needs to be watched, but we should keep in mind that the FOMC has signaled a shift to tighter policy and that any tweaking will come with that backdrop. That will keep some downward pressure on stocks and, as we have seen over the last few days, selling can quickly become exaggerated when everyone is looking at big profits that can be banked as they eye the year’s end.

What stepping back tells us, though, is that all of this uncertainty comes during a time of fundamental economic strength. That strength is largely being led by the consumer and, with a holiday season that may see some pent-up demand after last year’s frustrations upon us, that can be expected to continue. There are plenty of reasons to believe that December will be a month of volatility, but with that fundamental fact underscoring everything, it may pay to look for some opportunities on dips rather than getting panicked into joining the sellers.

Do you want more articles and analysis like this? If you are familiar with Martin’s work, you will know that he brings a unique perspective to markets and actionable ideas based on that perspective. In addition to writing here, Martin also writes a free newsletter with in-depth analysis and trade ideas focused on just one, long-time underperforming sector that is bouncing fast. To find out more and sign up for the free newsletter, just click here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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