@theMarket: Markets Up on Thin Holiday Trading

The Santa Rally continued this week with the S&P 500 Index hitting a new record high. Most stocks that gained did so on little volume. Don't read too much into this week's gains, however.

 

There is an old, rarely used term called "painting the tape." It is a mild form of market manipulation where market traders buy and sell securities among themselves to create an appearance of substantial trading activity. The goal is to fool investors into buying into stocks, sectors, or the market thereby driving prices higher.

 

These kinds of tactics often result in an unsustainable spike higher in the averages, followed by a period of consolidation, or decline. The back half of the week stocks consolidated but we will have to wait until the next week to discover the market's next move.

 

This week most newsletters, brokerage houses, and investment advisors were releasing their forecasts for 2022. Those predictions span the gambit. Some are buying value; others are buying growth. Many are simply arguing to buy both since they have no idea what will outperform. Most on Wall Street are sticking with large cap technology, arguing that they are both defensive and aggressive (go figure). Selling the high-flying, Kathy Wood stocks, seems to be a popular call. Bottom line — no one knows.

 

However, just about everyone will be taking credit for fabulous 2021 returns. Few will remind readers that it is not difficult to make money for their investors when the S&P 500 Index is up 25 percent for the year. If truth be told, credit for those returns should go to the United States government.

 

The Federal Reserve Bank's massive monetary stimulus, coupled with trillions of dollars of fiscal stimulus, created those gains in the stock market. Of course, no one wants to acknowledge that. But that era may well be over.

 

Last week, I warned readers that government stimulus is now winding down.

 

The U.S. central bank is planning to raise interest rates soon. Worldwide, some central banks are already doing just that. At the same time, fiscal stimulus is also declining. In the U.S., President Biden's Build Back Better spending plan is expected to be the last such program on the docket, if it is ever passes. Experts give it less than a 50 percent chance of succeeding.

 

So, let's keep this simple. Ignore the debate on how high inflation will rise (or not). Forget the arguments on when the supply chain bottlenecks will ease, or whether Omicron will be the worst, or even the last, variant to afflict the world. Answers to those questions are merely guesstimates anyway.

 

What we do know is what the government plans to do. Given their intentions, it is hard for me to believe that the economy can continue to grow at its present rate, while shutting off the spigot of all this government money. Common sense would tell you that the economy will take a hit, growth should slow, and with it, corporate earnings, which brings us to the stock market.

 

Sometime in the first quarter of 2022, I expect a rather serious correction in the stock market due to the government decline in stimulus. I have stuck my neck out and pinned late January, early February, as a possible start date for this event. What should you do?

 

I advise readers to hire an investment advisor as a first step. They will be able to maneuver through what I suspect will be a difficult year (or years) better than you can. If that is not an option, I suggest you reduce risk.

 

Move to a more conservative portfolio. Consumer durables, telecom, REITS, healthcare are some suggestions, but these sectors have already risen in price substantially in December. Make no mistake, however, if my call proves correct, you can expect losses no matter how conservative you may be. What I do not suggest you do is sell everything and move to cash.

 

For one thing, I could be wrong. Second, stocks could continue to rise over the next few weeks, or months, even if I am ultimately proven right. And after correction, I expect markets to bounce back. Very few will know when to get back in. So, stay invested, just not as aggressively.