Rising Standard & Poor’s 500

Indications for Santa Claus Rally and

Concerns about Inflation in 2022

Robin Zhu - Senior Correspondent, USA

12:00 AM, December 26, 2021

As a benchmark for the stock market performance, Standard & Poor’s 500 (S&P 500) is calculated from 500 listed companies’ stocks from diverse industries in the US. During the trading week from December 20th to December 23rd, except for the drop on Monday, S&P 500 has experienced a large increase for three days in a row. By the time the article is written, S&P 500 has risen to 4725.79, for about a 27% increase Year to Date.

Traditionally, in the final week of each year, there will be a Santa Claus Rally, in which the US stock market will rise up, as many new cashflows enter it. With an optimistic view, S&P 500 will continue this trend and go up in the final trading session this year. However, there are potential concerns about the market performance in the upcoming year of 2022. Firstly, the market volatility might go up when entering January, following the Santa Claus Rally, due to the decrease in new cashflows entering the market. Moreover, the inflation in the US economic environment casts doubt on the effectiveness of Federal Reserve System, and puts pressure on the stock market, since investors have the tendency to put their money in the bond market as inflation goes up.

According to Fed, “We tend to use ‘transitory’ to mean that it won’t leave a permanent mark in the form of higher inflation,” Fed Chairman Jerome Powell said, “I think it’s probably a good time to retire that word and try to explain more clearly what we mean.” As Fed admits that the inflation may become higher and still be a potential risk in 2022, there is a possibility that Fed will continue to rise the interest rates in 2022. Thus, undecided investors will perhaps put their money into banks, and the decrease in free capital in the stock market may imply that the stock market has reached a top in the short term. The decreasing confidence in the stock market and lowering investors’ expectations may have further negative impact on the market performance, and trigger the burst of the financial bubble existing in the market.

Generally speaking, the US stock market is affected by the continuous inflation, but in the short run, many investors can still gain from the upcoming Santa Claus Rally in the market. However, considering the market performance in the next year, investors should look closer into market signals, from information like the number of companies contributing to the increase in the S&P 500. For example, popular technological companies’ stocks, such as Google (Ticker Symbol: GOOGL), Microsoft (Ticker Symbol: MSFT), Apple (Ticker Symbol: AAPL), Nvidia (Ticker Symbol: NVDA), and Tesla (Ticker Symbol: TSLA), contribute much to the increase in S&P 500. If the number of rising stocks drops a lot, it might be an indication for investors that the market may have reached the top. To earn a stable return, investors should adjust their distribution of investments between risky and risk-free assets, and be mindful of the market signals and Fed policies.