Get set for a Christmas stock market rally as optimism returns

US stock markets plummet following Powell statement

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2022 has been a tough year for investors, with Russia’s invasion of Ukraine causing political and economic mayhem. Covid lockdowns in China, Taiwan war fears, rising US interest rates and post-pandemic supply shortages have added to the misery.

The impact on stock markets has been severe, with the S&P 500 down more than 20 percent, and once-mighty tech stocks such as Meta (formerly Facebook), Tesla and Netflix all crashing.

The cost of living crisis continues to cause misery for millions, but now there is a ray of light in the seemingly endless gloom.

Jeremy Batstone-Carr, European strategist at Raymond James, says the global economy may start to look a lot brighter in the run-up to Christmas, and investors should be ready for it.

He says investors are now wondering how to capture the so-called “Santa rally”, the seasonal stock market phenomenon where share prices rebound as optimism builds in the run-up to Christmas.

“Despite today’s uncertainties, the portents are actually fairly positive.”

The global economy may be sagging, recessionary pressures growing, inflation raging and interest rates rising, but things may soon get better.

Share prices have fallen but this has taken the “froth” out of the market and set the scene for a recovery as today’s pessimism has now been overdone. “Conditions are being set up for a more constructive 2023,” Batstone-Carr says.

Central bankers such as the US Federal Reserve and Bank of England have been warning of more interest rate hikes to come, as they battle to curb inflation.

That is the main reason why markets have fallen this year, even more than war in Ukraine, because higher rates force up borrowing costs and make companies and consumers poorer.

It also means investors can get a better return on cash, without taking the risk of investing in shares.

Rising US rates have driven up the value of the US dollar, making every other country feel poorer in relative terms.

The strong dollar has also driven up the cost of oil and gas, as energy prices are priced in dollars.

Now the Fed may be about to soften its stance on rates amid signs that inflation is slowing. “In the very near-term base rates are going higher for sure”, Batstone-Carr says, but a “de-escalation” may not be too far away.

In another positive sign, global companies have been busy buying back their own shares to take advantage of today’s low prices, boosting stock demand.

Many investors are also sitting on a large pool of cash, which they may deploy to buy shares when they see markets begin to pick up.

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We still face “profound underlying challenges” but these have been priced into today’s depressed share values.

Batstone-Carr says the stock market has not priced in the “likelihood that the eventual outcomes from the array of crises befalling the planet in 2022 may conclude constructively”.

He adds: “The recession may prove both short and shallow and will surely serve to reduce inflationary pressures.”

When that happens, interest rates will peak and corporate earnings rise. “With the challenges of 2022 in the rear view mirror the happy issue for investors will likely be how best to position portfolios for a more constructive future.”

Investing in shares will always be risky and predicting stock market movements is perilous. Yet if Batstone-Carr is correct, investors brave enough to buy shares at today’s lower prices may enjoy a happier Christmas after all.

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