Update - December 21, 2021

What’s Up With the Stock Market?

It’s the question on everybody’s mind… What’s up with the stock market?

What’s driving the nerve-twisting ups and downs we’ve seen over the last few weeks?

Lots of folks think it’s omicron, that dastardly variant that has so many folks locking down and locking up. It now represents 73% of all COVID-19 cases and has just killed its first victim in the United States (an unvaccinated man in his 50s with underlying health issues).

Other folks say it’s the Fed’s recent hawkish turn on inflation that’s pulling stocks lower. Last week, the nation’s money maestro vowed to double its rate of tapering and hinted that three rate hikes may be coming next year.

Money may soon get just a hair more expensive.

If all else stays the same, though, three quarter-point rate hikes would fail to pull real yields out of the red. With a current real yield on the 10-year Treasury of -0.96%, it’d take a boost of 125 basis points to get us back to where we were at this time in 2019.

That’s not likely. The markets would throw a fit.

Other folks believe the markets are selling off because Biden doesn’t appear to be getting his way on his massive Build Back Better plan… a monster of a package that would dump $1.75 trillion worth of money into the economy.

The plan is another huge piece of stimulus under the guise of social policy. It’s no wonder the market wasn’t excited about news of its failure in the Senate. The plan represents a lot of free money.

And finally, there’s one more reason the market is selling off. This is the one that gets the most weight from us.

Stocks are dropping simply because of the calendar.

Re-Slicing the Pie

Going into December, the S&P 500 was up by 20% for the year. That’s a huge move.

If we imagine the market as a pie, it’s now one-fifth bigger than it was at the start of the year.

But remember… just as air pressure works to create equilibrium, money goes where it is treated best.

That means massive sums of money are moving from one part of the pie to another as large funds, pensions and huge institutional owners shuffle their portfolios in preparation for year-end taxes, distributions, etc.

They’re moving money to where they think it will be treated best. Often that means selling to pay the bills.

Looking back, we see similar December dips in years with big gains. In 2017, December saw a harsh drop after the market had climbed 18% on the year. The same thing happened in 2014, when the S&P climbed more than 13%.

Add in the threats of a slowdown created by an unrelenting pandemic, a Fed that needs to clean up the mess that it created and huge political divisiveness in D.C., and you’ve got a recipe for a skittish market.

But the real question isn’t why the market is selling off. No, we should be asking whether the selling will affect us.

After all, we don’t need to know why it’s raining. We just need to know if we’re going to get wet.

It’s a much easier question to answer.

No… you should not be selling en masse.

Our strategy remains strong and proven. We will lock in our gains (and limit our losses) when our stop losses are hit… but we will continue to hold – and even buy more – as long as interest rates remain negative.

And when/if they do rise, we’ll adjust our strategy accordingly.

What we’re seeing is normal end-of-year market shuffling that’s been exaggerated by a market that’s anxious about a host of short-term issues. Folks who blindly sell now will regret it as the market plants its feet for 2022.

This is a good time to turn off the news, step away from the ticker feed, and enjoy the final few days of the year with family and friends.

Things will look different on Wall Street after the ball drops in 10 days.

With that, I hope you and your family have a relaxing and joyous Christmas.