Solid Year So Far, But Q4 Rally Destiny up to Fed

Even though recent market action makes it feels like 2021 has been a challenging year, it certainly has not been. In fact looking at the S&P 500 performance in 2021 compared to various 1-year seasonal patterns since 1949, this year has been great. Even after today’s setback S&P 500 is still up more than double its average performance over the last 72 years. When compared to average post-election year performance the outsized gains of 2021 thus far are even more impressive.

Omicron spoiled typical late-November bullishness and sparked the recent pullback, but as new data becomes available each day, the omicron variant is likely less of a concern for the market than the Fed. Persistent inflation is testing the Fed’s credibility and based upon recent comments its patience as well. Where the market goes from here may be decided by the Fed at its next regularly scheduled meeting on December 14 and 15. If they can manage to strike a perfect balance, then the market is likely to continue its typical Q4 rally through year-end. However, should the Fed choose to move too aggressively toward a tightening policy stance it could trigger more pain for the market in the near-term.

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