Federal Reserve Chair Jerome Powell, nicknamed “JPow” by retail traders and investors for his ability to kick the stock market up or down with his decisions, became an adored government figure for his dovish policies between 2018 and 2021.
Retail traders who entered into the stock market at the beginning of the COVID-19 pandemic became familiar with Powell for the central bank's decision to provide substantial liquidity to the stock market, helping rescue the economy during lockdowns. This became known as "printing money" among the retail crowd.
Although the quantitative tightening that began in 2022 wasn't a laughing matter for traders in the beginning, after a year of experiencing a bear market, it may be time to see some humor in how the Fed provided a strong bull market for new traders before pulling the plug.
Lately, traders have started to fear the Fed’s meeting minutes and Powell’s press conferences, often resulting in selling pressure across major indices heading into the monthly events. But is Powell the “big bad wolf” of Wall Street or a hero in disguise?
Looking Back At 2022
Among retail traders, and the general American public, fondness for Powell began to wane in late 2021, when the central bank began to shift its tone, signaling that a series of rate hikes in 2022 was needed to stomp out soaring inflation. The Federal Reserve followed through on its promise, implementing seven rate hikes last year, including four consecutive 0.75% hikes and two raises of 0.5%, which were kick-started with an initial hike of 0.25% on March 17, 2022.
With the federal funds rate now coming in between 4.25% and 4.5%, traders are hoping the central bank will start easing off on hiking rates in the first half of 2023 before holding rates near about 5% for the remainder of the year.
If that happens, and key indicators, such as jobless claims and the consumer price index, begin to show the economy is significantly weakening, the S&P 500 could begin to turn around in 2023 because the stock market is generally forward-looking.
As it stands, the bears are in firm control, and have fought back against the bulls on every rally during the last 12 months.
Some of the rallies tricked optimistic analysts such as chief market strategist at CarsonGroupLLC, Ryan Detrick, who attempted to preemptively call the end to the bear market on Dec. 1, 2022, just nine months into the cycle, giving false hope to retail traders who hold blood-red portfolios. Between Dec. 1 and Dec. 28, the S&P 500 slid 7.5%.
While the S&P 500 notched above the 200-day simple moving average on Dec. 1, indicating a bull cycle could be on the horizon, Benzinga saw signs of a bull trap, which we pointed out on Dec. 9 and which ultimately came to fruition, with December closing the month down 6%.
During 2022, the S&P 500 lost a total of 20%.
Looking Ahead At 2023
If the stock market starts to rebound into a bull cycle in the third quarter, it will align with the average bear market length of about 21 months. The S&P 500 has been in a bearish market since January 2022, although technically the cycle wasn’t confirmed until June 2022, when the index declined more than 20% from its Jan. 4 high.
There are signs the economy is slowing, with headline CPI data indicating inflation has come down from the 9.1% June peak to 7.1% in November. The 2% decline is small compared to the further 5% drop the Fed needs to meet its 2% target, however.
January started off with two key events –the release of the Fed’s November meeting minutes, where the committee indicated it may begin to soften its tightening measures and initial jobless claims for December, which contradicted the Fed’s hopes, showing the economy remains strong.
On Jan. 12, the U.S. Bureau of Labor Statistics is set to release CPI data for December, which will provide pertinent information as to whether the Fed is doing enough to tackle inflation and possibly set the tone for the stock market in the year ahead. The median forecast for core CPI year-over-year is 5.7%, indicating analysts expect a sharp drop in inflation.
If that expectation is met, the market could become convinced the Fed will meet its target this year, which could set the S&P 500 on an upward trajectory. In that case, Powell’s hawkish, or “wolfish” demeanor may soon be forgotten and the Fed chair could be heralded for his ability to hamper inflation without throwing the U.S. into a recession.
But What About A Santa Claus Rally?
Despite a few media outlets, such as the Wall Street Journal, reporting the stock market eked out a minor Santa Claus rally this year, based on Yale Hirsch’s 50-year-old definition of the phenomenon, only bullish traders who scalp traded the three-out-of-seven bullish days between Dec. 27 and Jan. 4 saw any significant gains during the period.
These media outlets appear to be including every year when the S&P 500 didn’t slide within the 7-day period as a Santa rally, which suggests the rally has occurred nearly 80% of the time since 1999, far above the 66% average Hirsch, who coined the term, saw in his research.
During the last five and first two trading days of the year, the S&P 500 chopped mostly sideways, notching out a small 0.8% gain over the period compared to the expected, and average, Santa rally of 1.3%.
In modern times, the definition of a Santa rally is generally believed to mean a sustained upward rally, which can take place anytime between Dec. 14 into the first days of January and can last as long as a few weeks.
Looking at the possible Santa rally period, the S&P 500 lost 3% between Dec. 14 and Friday, avoiding a loss of over 5% thanks to Friday’s sharp rebound.
Traders certainly didn’t feel a Santa rally this year and considering the S&P 500’s volatility has increased substantially over the past few decades, the traditional definition of the phenomena may need revision. After all, the S&P 500 moves an average of 1% on any given day, beating the tiny 7-day increase that took place.
Those who believe that a Santa rally took place this year, may see it as a sign that the stock market will head higher. Historically, a Santa rally can indicate a positive outcome for the stock market in the year that follows. Of course, a Santa rally isn't always indicative of a positive year ahead. The 1.4% rally in 2021 preceded the 2022 bear cycle.
Photo: Image created on midjourney.com
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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