Did Central Banks Cancel The Christmas Rally?

Central banks are in the center of the game again

The BoE actually surprised traders with a rate hike at its policy meeting, a move most on Wall Street were not expecting until early next year. That follows the U.S. Fed’s decision to increase the pace of its asset purchase “taper” and projections for as many as three rate hikes in 2022.

In contrast, the European Central Bank last week effectively made no changes to its level of support, choosing to wait and see what, if any impacts the new Omicron Covid variant might have on the recovery. However, the EU is facing the same relentless rise in inflation as the U.S. and the UK, and many analysts anticipate ECB officials will be pressured to act sooner rather than later.

More than a dozen global central banks have already raised interest rates this year so the ECB is in shrinking company. Whether lifting interest rates will have a material impact on inflation is still very much up for debate. There is also a lot of uncertainty as how reduced central bank supports might ultimately impact stock prices.

Do the bears have a chance?

Bears warn that all this “easy money” has been the fuel behind much of the gains in stocks over the last year and a half. They believe less liquidity flowing into markets from the Fed’s asset purchase program threatens less risk appetite on the part of investors.

At the same time, higher interest rates are a threat to tech companies and other so-called “growth stocks” that may be dependent on high debt loads.

In other words, many larger investors are reallocating away from stocks that might struggle when the “easy money” actually dries up.

Bears are quick to remind us, in 2018, when the central bank raised the fed-funds rate while it also began trying to shrink its balance sheet, the S&P 500 nosedived nearly -20%.

On the flip side, bulls see strong US corporate earnings and big jumps in corporate revenue as reason for the big rally.

Revenue increase

Keep in mind, Amazon‘s revenues have increased massively from 2019s $280 billion to around $470 billion. google has seen its revenues jump from around $160 billion to 4210 billion.

Facebook has jumped its revenues form around $70 billion in 2019 to around $117 billion. I could go on and on but I think you get my point.

Some US businesses have seen massive jumps in revenue and earnings since Covid hit.

Those companies are much more heavily weighted in the stock indexes so they have been carrying the load.

That’s why we are seeing such a split-market right now. Investors are dumping stocks in companies that might not have the right playbook or leadership team to navigate in waters where money is tight and rates are much higher.

What about next week?

Looking to next week, the Christmas holiday season is officially upon us with markets closed on Friday, December 24, Christmas Eve. That’s the only change to market hours next week as Christmas falls on a Saturday. The short week does however bring several key economic releases, including the final estimate of Q3 GDP, Consumer confidence, and Existing Home Sales on Wednesday; and the PCE Prices Index, Personal Income & Outlays, Durable Goods Orders, New Home Sales, and Consumer Sentiment on Thursday.