The stock market is poised for a Santa Claus rally through the end of the year, according to Ed Yardeni. Yardeni believes the midterm election will spark a strong rally that could last for months. “Yardeni said. Something is loading.
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The upcoming midterm elections could trigger a Santa Claus rally in the stock market that will stretch into next year, according to Ed Yardeni of Yardeni Research.
In a note to clients late last month, Yardeni pointed out that the midterm elections have been “consistently bullish” for the market, driving average gains for the S&P 500 up 0.5%, 0, 6% and 1.4% during the months of October, November and December, respectively.
The gains are even bigger when you look at the longer term. Based on historical data analyzed by Yardeni, since 1942 the S&P 500 has posted three-month, six-month and 12-month average gains after the midterm election of 7.6%, 14.1% and 14 .9% respectively.
“We concluded, ‘Yes, Virginia, there really is a Santa Claus rally. Apparently that tends to be even more likely during midterm election years,” Yardeni said.
But historical data is not indicative of future returns, and investors have a lot to deal with that may not have been present in previous year-end rallies. Inflation is steadily hitting four-decade highs, the Fed is on track to aggressively hike interest rates by more than 400 basis points this year, and consumers are pressured by wage growth that is not keeping up. not the wider pace of change in prices.
On top of that, the Fed is starting to shrink its balance sheet by nearly $9 trillion by removing $95 billion of Treasuries and mortgage-backed securities per month.
But Yardeni says the market already knows all that.
“The market knows they are [Fed] going to make 75 basis points. Now the market is only confused about 50 from 75 basis points in December,” Yardeni told CNBC last month. “I think what the market is looking for is a break, I don’t think not that they are looking for a pivot. They are looking for a break. The Fed has been terribly aggressive.”
And the economy is holding up very well, with third-quarter GDP beating expectations and the labor market remaining resilient. New job openings in September increased by nearly half a million. Still, this puts the Fed in a more hawkish position as it attempts to rein in inflation by slowing the economy. And stocks don’t like a hawkish Fed.
“The main bearish theme for equity investors this year has been the old adage, ‘Don’t fight the Fed,’ especially when the Fed is fighting inflation. However, the market may be starting to price in a red wave mid-term congressional elections and a rapidly approaching terminal federal funds rate.Perhaps another old adage is about to play: “Don’t fight Santa after the midterm elections,” has concluded Yardeni.