One chart explains why the stock market is back in rally mode: Morning Brief

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Monday, December 13, 2021

And the verdict is: Interest rate hikes from the Federal Reserve in 2022 are OK, says Mr. Market. 

Dare I say this week’s Fed decision on Wednesday may be a non-event for the markets? (Our Fed correspondent Brian Cheung shudders at this mere suggestion.) How else should one assess the landscape going into the meeting — stocks shook off the highest Consumer Price Index (CPI) reading since June 1982 on Friday and powered to records. The S&P 500 closed up 3.8% for the week, and gained in four of five trading sessions. All amid a looming Fed meeting, where Chairman Jerome Powell is likely to stick the word “transitory” when discussing inflation in the burning trash bin and uncork the start of a bond tapering program. 

So what gives with these rally vibes that are conjuring up visions of a Santa Claus Rally? 

Well, the market may have already priced in a series of rate hikes next year, pros believe, as the nifty chart below from the strategy team at Jefferies shows. The chart indicates the market is currently expecting nearly three rate increases in 2022 and yet stocks (and household name stocks, as I detail below) are at records.

Rate hikes all priced in?

“A lot of near-term hawkishness is thus already in the price,” Jefferies strategist Sherif Hamid says. 

Goldman Sachs is on the three rate increases bandwagon, too. 

“A hike at the March meeting is possible, but we think the FOMC is more likely to wait until May for a few reasons. First and most simply, a turnaround from tapering to rate hikes of just a few days seems uncharacteristic of the Fed. Second, waiting a bit longer would give the labor market more time to progress toward an outcome that Fed officials might more comfortably describe as maximum employment. Third, virus cases might be high in March due to the effects of both colder temperatures and the Omicron variant, which could make a rate hike seem awkwardly timed,” explains Jan…


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