Five Reasons for Stocks To Rally Into January

The stock market should rally to new highs into January for a number of reasons.  /1/ Economic growth is strong.  /2/ The Fed's shift to fighting inflation, although not yet through higher rates, reduces the significance of currently high inflation,  The markets can treat it as temporary.   /3/ The risk of Russian armed aggression against the Ukraine and of China against Taiwan may be more significant in the Spring. /4/ The Senate vote on the tax/spending bill may be pushed back further.  /5/ Strong Q421 corporate earnings are expected. 

The economy's strength is seen in the downtrend in the Unemployment Claims data.  While still early, there's reason to think they will point to a speedup in December Payrolls. The 4-week average of Initial is 219k, well below the 273k going into the November Payroll Survey Week.  This week's US economic data should flesh out the picture of solid growth.  In particular, consensus looks for +0.8% m/m Total November Retail Sales and +1.0% Ex Auto Sales.  This would be impressive after the 1.7% jump in October.  And, it could argue that monthly sales were, indeed, better than suggested by the Black Friday experience.  But, they may have to print even stronger to match the expectation for consumer spending built into the Atlanta Fed model's 8.6% Q421 Real GDP forecast.

The Fed is likely to increase the speed of tapering at this week's FOMC meeting.  There's no reason to think officials will not match market expectations of doubling the monthly tapering to $30 Bn from the current $15 Bn.  This will eliminate the expansion of the Fed's holdings of Treasuries and Mortgage-Backed Securities by February-March.  It will not mean the Fed will begin hiking rates at that point.  But, even if it does, the market rule of thumb is that 3 hikes are needed to turn down the stock market.  To be sure, the rule might not work this time, given the rate hikes will have been preceded by the tapering -- which, in effect, is like a tightening.  Meanwhile, the markets will likely view potential rate hikes as undercutting the likelihood that currently high inflation prints will last for long.

There are a couple of reasons to think a Russian/Ukraine or China/Taiwan conflict is not imminent.  /1/ Winter weather was a problem in the Napoleonic and German invasions of Russia.  Knowing this, Putin may want to wait to Spring.  /2/ China will probably not initiate an attack ahead of the February Olympics.  One curious thought is that Russia and China could act at the same time, making a US/European response even more difficult.

News reports are raising the possibility that Senator Manchin may be even less enamored with the Building Back Better bill after the November CPI underscored his concerns about its inflationary implications and the CBO estimated  a $10 Tn cost (over 10 years) if the short-term measures in the bill are subsequently made permanent (and not offset by even higher taxes).   Biden will speak with him on Monday.   So, headlines regarding this meeting could hit the markets.

Consensus looks for about +20% (y/y) in Q421 corporate earnings.  This would be the 2nd quarter in a row that y/y growth slowed, as the boost from pandemic-related easy year-ago comparisons unwinds.  But, it is still historically strong.