“Santa Rally” Arrives on Cue

After shaking out bears and nervous hands in early December, the Santa Claus rally arrived, almost right on cue.  Last week ended with a 3-day, 3+% rally that took the S&P 500 to a new closing high at 4726. It was a broad advance as all the major indices closed the week with gains.  Omicron, inflation, interest rate headlines sparked early December volatility, but the stock market continues its bullish trend for 2021 in December.

The S&P 500 rose 2.28% overall last week, outperforming much of the world despite the spike in COVID cases.  Senator Manchin levied a death blow to the overly aggressive version of President Biden’s Build Back Better Plan. Gains were broad-based in the markets, with both technology shares and “reopen” sectors like cruise lines and concert operators leading.

The MSCI Europe rose 2.31%, powered by cyclicals like energy and industrials. Emerging markets (think China, Russia, and Brazil) lagged developed markets again and risk finishing 2021 in the red as political developments in South America have driven markets downward.

In the four weeks since Omicron first appeared, markets have been waffling at the ultimate economic impact of the new variant. For equity markets and short-term rate expectations, the net effect has been almost a draw, with the S&P 500 now up slightly from its pre-Thanksgiving close, and two-year Treasury yields up 5 bps over that period. The key takeaway here is that investors expect Omicron to be a hurdle for growth in the first half of 2022 but not cause a large scale slowdown.

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