Is Santa Claus coming to town?

It’s frustrating to see all the holiday things out before Halloween is even a memory. But even if I’m not ready for eggnog and tinsel, the time has come for stock market investors to wonder if we’ll see a Santa Claus rally this year.

For those not used to the term, “Santa Claus rally” refers to a pattern of market lift in the latter part of the year. There’s plenty of debate about whether the phenomenon is meaningful or just coincidence. But either way, now’s a good time to wonder: Is it possible we are through the worst of this market? Will Santa bring us some positive price movement as we end the year?

How does the economy navigate out of inflation?

Those questions take us right back to the topic we’ve focused on throughout the year: the inflation rate. The Fed is seeking to cool the economy to combat inflation. That’s happened in several key areas, including housing, new orders and profits, as shown in the accompanying chart. But the last area—employment—doesn’t yet show cooling effects.

Because the jobs market makes up an average of about 70% of companies’ costs, it’s a big part of what needs to soften for the inflation genie to be put back in the bottle. A cooling job market could allow a healthy reset in the economy. The Fed could stop or slow the pace of raising rates. The markets generally would have a good tailwind rather than the pressure we have seen lately.

One very important point is that the markets are always forward looking. Jobs are a trailing indicator, so we do not need to see the “perfect” (lower) jobs number to have the markets move in a favorable direction. Some indication of a directional softness to a more normal unemployment rate would certainly be welcomed.

Is Santa packing his sleigh?

Unfortunately, from an inflation standpoint, the recent jobs market report was still very strong even in the face of some very fast and large interest rate increases. The unemployment rate did go up 0.2 percentage points, to 3.7%. That’s a minor victory for the Fed, perhaps. However, by many measures, that is still a very strong jobs market. There are many reasons for the strength of that market once you start to sort through the data that make some sense, as frustrating as it might be to the markets. Here are a few:

• Corporate revenues are up about 8% on average as companies have been able to pass on price increases and consumers have been willing to pay those prices. In that environment companies are not as likely to start laying people off.
• Additionally, some of the COVID-hit sectors such as Healthcare, Travel, and Leisure have seen a surge in hiring to rebuild following big losses during the worst of COVID. That is a more unusual circumstance that normally we would not see at this point in the cycle.
• Lastly, as many of you running a business can attest, finding good employees has been very difficult the last few years in every sector. Therefore, there are some indications companies are very hesitant to let those workers go even if their specific industry might be experiencing some softer sales at this point.

We will certainly welcome Santa’s arrival should it occur, but the data is a bit mixed. There is a lot of bad news already factored into many parts of the market. The Federal Reserve certainly does not seem likely to see the most recent jobs report as weak enough to hamper its current policy. We will continue to review the data and make allocation decisions based on those facts and rebalance should the volatility continue. In the meantime, enjoy this holiday season. It’s almost time for that eggnog.