Here’s why investors can forget a Santa Claus rally for the stock market this year, according to Citigroup

By Barbara Kollmeyer

“Santa may not be delivering this year.”

That was the humbug take on Citigroup’s global asset allocation team, which predicted that Wall Street is unlikely to see a rebound towards the end of the year as 2022’s performance so far hasn’t been good enough.

“With a Fed pivot out of the question for now, the focus for the remaining bulls is slowly shifting to whether the mid-term periods and improved November/Dec seasons can improve stock prospects. We doubt it,” said a team led by strategist Dirk Willer, in a note to clients released on Friday.

A year-end rally “depends critically on how well the market has performed through year-end. Only when yields were strong from January through October was a year-end rally in sight,” Citi said.

A 21% loss so far in 2022 for the S&P 500 has put the index on track for its worst annual return since 2008, when it plunged 38% amid the 2008 global financial crisis. After the Federal Reserve earlier this week announced a third hike of 75 basis points and said more tightening was imminent, the index is poised for a nearly 3% weekly decline.

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A recent drop in the index to 3,900 has some strategists fearing the index could touch its June low of 3,666.77 as investors face a wall of concern that includes high inflation, economic slowdown and fears of an escalating war in Europe that has already triggered an energy crisis for the region.

Goldman Sachs on Friday cut its year-end target for the S&P 500 to 3,600 from its initial guidance of 4,300, citing a “dramatic” shift in the path to higher rates.

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The so-called Santa Claus Rally refers to gains made during the last 5 sessions of a calendar year and the first 2 of the following year. Earlier this year, the market delivered what LPL Financial said was the best rally of its kind in nine years.

Willer and the team say markets are facing a likely recession in the US, which the Fed has all but promised, with a possible over-tightening by the central bank likely to deliver.

“It’s common knowledge that earnings estimates have to fall in recessions and that current estimates for 2023 are too high. However, equity markets are unlikely to see through falling valuations as valuations tend to shrink in recessions,” he said.

The Citi team said it remains broadly underweight equities and reduced its overweight in Chinese stocks, despite being overweight UK defensive stocks. “We remain defensive in the US sectors as well. We remain long healthcare and short financials and industrials, but add a long position in utilities instead of communications.”

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The bank is negative on credit, shorts base metals and has moved to the sidelines on gold on anticipation of further dollar upside.

Read: S&P 500 sees its third leg down more than 10%. The following shows the history of previous bear markets, making new lows from there, according to Bespoke

Also, the pound and euro slump as the dollar index surges to its highest level since mid-2002

-Barbara Kolmeyer


(ENDS) Dow Jones Newswires

9/24/22 1226ET

Copyright (c) 2022 Dow Jones & Company, Inc.

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