No Santa Claus rally in sight as stocks round out grim 2022: What to know this week

This coming holiday-shortened week will round out a brutal year for Wall Street as 2022 comes to an end.

The U.S. stock and bond markets will be closed on Monday, December 26, in observance of Christmas Day.

The earnings and economic calendars will be light, with much of the business world off until next year.

Traders who are working through the holiday period will get readings on wholesale and retail inventories, weekly jobless claims, and the latest S&P CoreLogic Case-Shiller home price index.

When investors return from a long weekend Tuesday, hopes will be high for a Santa Claus Rally – a seasonal rise in the stock market that occurs at the end of December. But with selling pressures remaining in place over fears about a looming recession, the favorable season pattern may take this year off.

The Santa Claus Rally is typically defined as the last five trading days of the year and first two of the new year, with Yale Hirsch, creator of the Stock Trader’s Almanac, coining the term back in 1972.

During this period, the S&P 500 has historically churned out an average gain of 1.3% going back to 1950, according to data from LPL Financial. This compares to a 0.2% average return for all rolling seven-day returns.

Santa Claus looks on at the 98th Annual Christmas Tree lighting ceremony at the New York Stock Exchange on December 1, 2021 in New York. (Photo by Bryan R. Smith / AFP) (Photo by BRYAN R. SMITH/AFP via Getty Images)

More importantly, the Santa Claus Rally is often seen as an indicator for future market performance. The S&P 500 has historically underperformed in January and over the following year when a year-end rally failed to unfold, LPL Financial indicated.

Yale Hirsch even prophesied: “If Santa Claus should fail to call, bears may come to Broad and Wall.”

“It’s not too late for the Santa Claus rally, but unfortunately positive inflation data has been overshadowed by the Fed’s tough language and the upcoming recession that they’ve orchestrated with their aggressive rate hikes,” Chris Zaccarelli, chief investment officer of Independent Advisor Alliance said in a note.

With the year nearing an end, 2022 is so far on pace for its worst annual performance since the Global Financial Crisis in 2008. It will also mark the end of three consecutive years of gains for the stock market, and a dramatic comedown from 2021, which saw the S&P 500 return nearly 27%.

The S&P 500 historically underperforms in January and over the following year when there is no year-end Santa Claus Rally prior. (Credit: Adam Turnquist, Chief Technical Strategist, LPL Financial) — The S&P 500 historically underperforms in January and over the following year when there is no Santa Claus Rally prior. (Credit: Adam Turnquist, Chief Technical Strategist, LPL Financial)

Much of that is owed to the historic actions of global central banks, which have raised interest rates in lockstep to rein in the highest inflation in decades after a period of extensive fiscal stimulus. The U.S. Federal Reserve has raised interest rates by a cumulative 4.25% this year, the most since 1980, while signaling that further hikes were likely in the year ahead.

After central banks delivered their final increases of the year last week, equity markets experienced their worst ever exodus, notching outflows of nearly $42 billion, per figures from Bank of America, Citigroup, and Barclays, which each cited EPFR Global data.

Looking ahead, there may not be much upside for equity investors next year, with monetary policymakers around the world asserting firmly that they are certain to press on with tightening financial conditions next year until price stability is firmly restored — a reality that has many of Wall Street’s biggest names bracing for a long road to nowhere for U.S. stocks.

Last week, veteran hedge fund manager David Tepper said he was “leaning short on the equity markets” over concerns rising interest rates will further batter stocks.

“I think the upside/downside just doesn’t make sense to me when I have so many central banks telling me what they are going to do,” the founder and president of firm Appaloosa Management said Thursday in an interview with CNBC’s Squawk Box.

“Sometimes they tell you what they are going to do, and you have to believe them.”

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Economic Calendar

Monday: No notable reports scheduled for release. Markets closed for Christmas holiday.

Tuesday: Wholesale Inventories, month-over-month, November Preliminary (0.5% during previous month); Advance Goods Trade Balance, November (-$96.8 billion expected, -$99.0 billion during prior month); Retail Inventories, month-over-month, November (-0.1 expected, -0.2% during prior month); FHFA Housing Pricing Index, month-over-month, October (-0.6% expected, 0.1% during prior month); S&P CoreLogic Case-Shiller 20-City Composite, month-over-month, October (-1.40% expected, -1.24% during prior month); S&P CoreLogic Case-Shiller 20-City Composite, year-over-year, October (8.20% expected, 10.43% during prior month); S&P CoreLogic Case-Shiller U.S. National Home Price Index, year-over-year, October (10.65% during prior month); Dallas Fed Manufacturing Activity, December (-14.4 during prior month)

Wednesday: Richmond Fed Manufacturing Index, December (-9 during prior month); Pending Home Sales, month-over-month, November (-1.0% expected, -4.6% during prior month); Pending Home Sales NSA, year-over-year, November (-36.7% during prior month)

Thursday: Initial Jobless Claims, week ended Dec. 24 (216,000 during prior week), Continuing Claims, week ended Dec. 17 (1.672 million during prior week),

Friday: No notable reports scheduled for release.

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