It feels like déjà vu. Coming into the home stretch of 2022, stocks are living up to their historical tendency to rally in the final months of the year. But the key question we ask ourselves is whether the current rally will hold or fade, as we’ve seen happen twice before over the course of this year.
The S&P 500 has struggled to find a consistent trend all year long since reaching a high right out of the gate on January 4. Though the broad equity markets have made some impressive attempts at recovering, these attempts have ultimately failed. The current rally started in October, and November brought some positive news that gave a boost to both stocks and bonds, despite the uncertainty over the midterm election results. Consumer and producer price index data for the month of October provided evidence that inflation could be slowing. Also, the minutes from the Federal Reserve’s November meeting indicated that the pace of interest rate hikes could be slowing going forward. Finally, retail earnings reports gave evidence of consumer strength, helping to alleviate worries about the economy.
The fact that the equity markets have been able to build on their strong performance from October into November has been encouraging. As we’ve discussed in previous market updates, FSA watches for the S&P 500 to break above certain levels to provide support for wading back into equities, beginning with our most aggressive strategies. Given those signals, we increased equity exposure in the Core Equity and Tactical Growth strategies in November. The table below shows how the various strategies were positioned as of the end of November:
If the market rebound continues, our more conservative strategies, such as Conservative Growth and Income & Growth, will also wade back into the markets, albeit at a more measured pace. The broad equity market has spent this year making lower highs and lower lows, as illustrated by the red lines on the chart below. This is the pattern of a market that is struggling to find its footing. We want to see the S&P 500 break out of this pattern to the upside and build on its recent strength before bringing all strategies back to being fully invested.
Another pattern we continue to see is how quickly market sentiment changes based on the news of the hour. In the last days of November, stocks tumbled over worries that the protests in China would lead to supply chain disruptions. Then they rallied on Fed Chairman Powell’s remark that smaller interest rate hikes could start as early as December. This almost daily battle of good news versus bad continues to make for a very volatile market environment.
As a reminder this time of year, many mutual funds will be paying their year-end distributions in December. When a fund pays its distribution, expect the price to drop, reflecting that payment. Once the proceeds are reinvested into your account (usually the next day), the fund’s value will increase back to normal.
We wish you and your families a wonderful holiday season and a new year that brings good health and happiness.
Mary Ann Drucker
Assistant Portfolio Manager
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