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December 2021 Stock Market Outlook – Forbes Advisor - Forbes

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November began with stocks on another tear, setting record high after record high, but ended abruptly with the market in retreat. By the end of November, the SP 500 had fallen 2.9% from its latest all-time high, and closed out the month down 0.8%. Meanwhile, the Dow Jones Industrial Average (DJIA) tumbled 3.7% and the Russell 2000 slumped 4.3%, for its worst monthly performance since March 2020.

A familiar cast of characters is to blame—from the new omicron Covid-19 variant and stubbornly high inflation to concerns about the Federal Reserve’s next steps and supply chain disruptions. Individually, each factor might be easily brushed aside, but taken together they are ruining the holidays for investors who’ve watched markets rack up a 23% surge year-to-date.

That said, stock market sell-offs have been pretty lackluster in 2021, disappointing commentators who believe a correction of 10% or more is long overdue. Whether they’ll be finally proven right in December remains to be seen, although there is a long-term trend of historically strong markets in this month. The SP 500 has gained 73% of the time in December since 1928, according to data compiled by Yardeni Research.

^SPX Chart

^SPX data by YCharts

The uncertainty makes December particularly important, says Ryan Kelley, chief investment officer of Hennessy Funds. “December really sets us up for next year, and how things play out will let us know how we’re doing coming out of this crisis,” notes Kelley.

To begin the month, expect the stock market’s daily swings to be at the whim of market participants who are trying to make sense of how the omicron variant could derail the reopening of the economy. But the Fed’s meeting mid-month and economic reports, particularly those focused on consumers, may once again steal the spotlight.

All Eyes on Omicron

It’s been almost two years since the first case of the novel coronavirus was detected in the U.S., and investors are worried anew about the omicron variant. While there still are some questions surrounding omicron, including how transmissible and vaccine-resistant it proves to be, few investors question what the variant means now: More market volatility.

“One thing we know is that investors dislike uncertainty,” says Michael Sheldon, executive director and chief investment officer of RDM Financial Group. “Unfortunately, it may be several days before we find out more information on the new virus and what it may mean for the economy and the markets.”

This wait-and-see mentality may apply to learning more about the variant and how various major global economies will respond in terms of restrictions—but markets are impatient. Omicron fears have already rattled the stock market, as the SP 500 tumbled just over 2% on Nov. 26, the day since the variant was classed one of concern by the World Health Organization (WHO), marking its biggest slump since February.

“Per usual, changes happen quickly when there’s a new variant that comes out,” Kelley says. Global economies are still in the reopening phase, and omicron could be a setback that makes existing supply chain issues worse, he adds. “It’s not to be underestimated.”

Despite Omicron, Fed Could Accelerate Tapering

While the Federal Reserve isn’t underestimating omicron’s potential, it appears undeterred in its plan to taper bond purchases—and even speed up this effort.

In comments that left some market participants befuddled, Fed Chair Jerome Powell told the Senate Banking Committee on Nov. 30 that the omicron variant poses “downside risks” to employment and economic activity and that “the threat of persistently higher inflation has grown.” Yet Powell suggested the Fed could speed up tapering plans of its program to buy at least $120 billion of bonds as soon as December.

Powell’s comments were an about-face of sorts because Fed policymakers have for months maintained that higher inflation is “transitory.” With the prospect of an accelerated taper now in the mix, the next question is: When will the central bank hike interest rates in 2022? Traders now see a 50% probability of at least one rate hike by early May, up from a 35% likelihood just one month ago.

“We’re in a period of a real conundrum for the Fed,” Kelley says, adding that a “tenuous” situation puts more pressure on policymakers to find the right timing for both tapering and raising interest rates. “They need to worry about inflation and full employment while not moving too quickly so as not to take the wind out of the sails of the recovery,” he says.

As investors continue to digest Powell’s latest comments, there’s likely to be only more volatility. “The thing that moves the market is changes in expectations,” Kelley notes. That said, market participants could get some clues about the Fed’s next steps when policymakers convene for their final meeting of the year on Dec. 14 and 15.

A Holiday Season with Higher Prices, Supply Chain Issues

Of course, inflation is only a Fed worry—it remains a major theme for the market, notes George Young, partner and portfolio manager at Villere Co. It’s also top of mind for consumers, who are grappling with “things getting more expensive.”

The all-important shopping season is already underway—and holiday sales during November and December account for about 19% of annual retail sales, according to the National Retail Federation. The trade group is forecasting that holiday sales could rise between 8.5% and 10.5%, compared with 2020, to a record $840+ billion.

While higher prices could curb some spending for consumers this holiday season, supply chain issues may also affect consumer spending, Kelley says. That’s why he will be focusing on the following questions this year: “How much are people finding the products they want—and then buying them?”

Key economic data to monitor include the monthly retail sales report, which is scheduled for release on Dec. 15, and the initial jobless claims reports, released each Thursday.

Unlike most holiday decor, higher inflation and supply chain issues are likely to stick around after the shopping season has concluded. Kelley expects supply chain issues to be a theme in 2022 while Sheldon adds: “The inflation story is also likely to be with us for longer than initially thought, but we believe some moderation appears likely in the coming year.”

How to Invest in December

December may be a good time for buy-and-hold investors to get a bit more tactical with their portfolio, both with buying and selling decisions.

Tax-loss harvesting—or selling some investments at a loss to offset investment gains elsewhere—is always common in December. But it may get some additional interest given the likely prospect that tax rates are headed higher next year.

“Depending on the individual situation, it may behoove you to take some gains at the end of this year instead of next year,” Young says. What’s more, tax-loss harvesting could create a buying opportunity. As other investors look to get rid of stocks they’ve deemed to be “losers,” at least for tax purposes, buyers may be able to scoop up these stocks at a bargain, he adds.

While stocks in the travel and leisure industry may be ripe for tax-loss harvesting, you may want to get creative and think beyond hotels and airlines to related companies for buying opportunities, Young advises. What’s more, there may be some “undiscovered gems” among small– and mid-cap stocks, so long as you’re able to stomach higher volatility and less liquidity, he adds.

If you prefer stocks that pay a solid dividend—and have lagged behind the market—consider the utilities sector, Kelley advises. As with the fable of the tortoise and the hare, some investors may be overlooking utilities in lieu of flashier stocks. “They have been the tortoise for too long,” he says. On the other end of the spectrum, energy stocks—the best performing of the SP 500’s 11 sectors so far this year—could have more room to run in 2022, he adds.

The final weeks of the year will also bring a lot of predictions about what’s in store for 2022, but that doesn’t mean that stocks are likely to fall out of favor. Given the choice between stocks and bonds, “stocks are really the best alternative,” so long as you’re disciplined to invest for the long term, Young advises. Even if the recent selloff worsens, it’s important to keep perspective about the relationship between the stock market and the economy, Sheldon adds.

“One thing we can observe is that over the past few decades, economic expansions have tended to last a number of years as opposed to a number of months or quarters,” he says.