The stock market has been on a fairly bumpy path of late, with the S&P 500 having suffered a selloff in the last week or two before rebounding roughly 3% so far this week. But one strategist believes there could be more pain ahead in the New Year.
“We do think we’re so hyper focused on the Fed and inflation [that] those two things are in the driver’s seat, so to speak, and that could cause some of the weakness. It could even be a 10% correction, to be honest,” Ryan Detrick, chief market strategist at LPL Financial, told Fortune.
A number of catalysts could contribute to a pullback in early 2022, Detrick said, including ongoing worries about the Federal Reserve’s timeline with tapering and possible rate hikes in light of inflation hitting nearly 40-year highs, as well as the fact that 2022 is a midterm election year. “Midterm years tend to be volatile—We had a big pullback in 2018, … [and I] wouldn’t be surprised if it happen again,” he said.
But whatever the individual factors may be, Detrick suggests that ultimately, “the market is ready for a break.”
With “only one 5% correction all of this year, history would just simply tell us, ‘Hey, we’ve been pretty spoiled. Midterm years are more volatile.’ So we do think the first quarter of next year, we can have … a little more volatility,” he said.
Despite Detrick’s belief that more volatility might hit markets come the new year, he believes a late-year rally (often deemed the “Santa Claus rally” in December) is possible.
“The reason that we have the Santa Claus rally, or strength late in the year, is not so much buyers are there, it’s [the lack of] sellers,” he suggested. Detrick explained that, “Maybe people say, ‘Okay, I’m not going to sell yet,’ you know, ‘I’ve got these big gains, I don’t want to pay taxes on it [yet], I’ll wait until next year.'”
“That’s why we’re a little more concerned near term,” Detrick added. “We could finally have a little more volatility pullback early next year,” and he “wouldn’t be surprised” if there was some profit taking in January or February.
Long term, however, Detrick argues the bull market can continue into 2022, though it may be “choppier” (LPL Financial recently released their 2022 outlook, which included a 5,000 to 5,100 “fairly valued” price target for the S&P 500 by the end of next year). In particular, he’s optimistic about strong consumers and corporate balance sheets, and suggests that if there is a pullback, it could provide a buying opportunity.
Others like Lindsey Bell, chief markets and money strategist at Ally Invest, believe that even if the Fed begins its rate hikes earlier next year, things could still ultimately bode well for stocks—so long as the hikes are orderly. “While the market doesn’t particularly like this change, it is a sign the economy is gaining strength and moving further past the healing stage. The good news is small, gradual rate hikes rarely upset economic growth. That creates an environment in which stocks can continue to perform well,” she wrote in a note.
For now, it’s likely all eyes on the Street will be focused on the Fed’s meeting next week for clues as to just how happy the holidays might be for stocks.
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