It is only two days left for Christmas, and whether or not you believe in a “Santa Rally”, there are some trending themes in the financial markets which could help with your year-end trading strategy. From a macro point of view, the bulls still have their fundamental support at this point in time, which means you could see a fresh high in the US stocks again during the holiday season and into the new year.
It is the time to bounce when all the bad news is settled?
There are two elements composed of the negative impact on sentiment in December, the Fed’s decision, and the omicron fears. Fed decided to double the pace on tapering of bond purchase and projects three interest hikes in 2022, which was expected, and markets had priced in multiple times since the beginning of December. At the same time, omicron fears look like fading off as more positive comments are made by medical officials. The omicron hospitalization risk is 80% less than the other variants and the severity is 70% lower than Delta, according to a fresh study from South Africa. And the FDA granted Pfizer's Covid treatment pill as emergency authorisation to people at high risk who develop severe Covid-19 on Wednesday.
Now that the big news is settled, stock markets are heading into a new bullish wave towards the year-end. The US major averages rebounded for the second consecutive day this week. The S&P 500 is only 1% off the all-time high seen on the 16 December. The S&P 500 gained 27% YTD, outperformed the other two averages.
US indices' performance (23 December)
|
Index |
Daily |
Weekly |
Monthly |
Yearly |
|
+0.74% |
-0.48% |
-0.17% |
+18.67% |
|
|
S&P 500 |
+1.02% |
-0.28% |
+0.12% |
+27.28% |
|
+1.18% |
-0.28% |
-1.61% |
+21.54% |
What is the Merrill Lynch clock suggesting ?
In 2021, energy is leading the gains, up by 45% year to date, followed by real estate (+36.63%), financials (30.47%), and information technology (30.25%). According to Merrill Lynch's investment clock, tech stocks rise in the business cycle of recovery, and energy outperforms in the cycle when the economy overheats.
Since March 2020, we can see a reflection of the cycle was that tech outperformed in 2020, and energy shines in 2021 when inflation heats up. Coming into 2022, the clock is pointing to the stagflation stage, and suggests defensive stocks, typically in utility and consumer staples, are in the direction of funds flow.
We don't have to copy the trends that the clock suggests, but it is worth keeping the trending in mind. The Federal Reserve has started a tightening monetary cycle, while the recent US labour department’s data shows the employment pace is slowing down. The yields curve is flattening to reflect a slowing-down outlook in the economy. All of the signs suggest 2022 will be falling into the cycle of a stagflation year. And when liquidity slowly dries up, it does not necessarily cause a crash, but most likely slows down the bullish pace.
The investment clock of Merrill Lynch
USD is trending higher in the new year
The USD weakened recently, pressed by a buying frenzy in the stock markets and tepid bond yields. But the bullish trending has started early in May when the US inflation has shot to a decades-high above 5%, together with a spike in the bond yield, as investors realised that high inflation would eventually force the Fed to start the tightening monetary cycle earlier than its initial plan. And now the US dollar index was up by 7%, to 96.05, since the low at 89.51 in May.
However, in the short-term view, the bullish sentiment in the risky assets will continue to restrain the USD uptrend. The dollar might be in the pullback move going into the new year.
Gold and oil
Gold is not being supported by Macro views. A strengthening dollar and rising interest environment are not supportive of the gold’s fundamentals. As we can see the recent gold moves are very tight in their range between 1,815 and 1,760. We do not expect the base metal could skyrocket again in the upcoming economic cycle, especially since the Fed has already placed a view of a three-interest hike in 2022. If the dollar strengthened further, we might see gold is topping and falls to the $1,600 level.
As for crude oil, the rebounding momentum most likely continues as there are expectations for a boom in the travel stocks when people’s life comes back to normal. Rising demand and a slow pace of output increase will be the ongoing support for the oil price. However, like what was suggested in the Merrill Lynn clock, energy will not be in favor of investment funds when it comes into the “Stagflation” cycle. And renewable energy and electric cars could eventually hit on the fuels price.
