The markets have pulled back the last three trading sessions and look set to base and move higher into year end. There was a buyer’s strike heading into the FOMC meeting, but we expect a “buy the news” rally. It is widely expected that the Fed will announce a tapering of bond purchases. It was also encouraging to see markets rally intraday on Tuesday. 1) The S&P 500 is still near its all-time highs. 2) Sentiment has collapsed in the past two days and 3) We think the odds favor a “buy the event” rally.

We are all looking for the famous Santa Claus rally. What is the Santa Claus rally? Well here you go: A Santa Claus rally is a calendar effect that involves a rise in stock prices during the last 5 trading days in December, and the first 2 trading days in the following January. According to the 2019 Stock Trader’s Almanac, the stock market has risen 1.3% on average during the 7 trading days in question since both 1950 and 1969. Over the 7 trading days in question, stock prices have historically risen 76% of the time, which is far more than the average performance over a 7-day period.

Higher and broader inflation in November:

Inflation pressures continued to mount in November, reflecting robust consumer demand and persistent shortages due to ongoing supply chain issues. The Consumer Price Index (CPI) increased 0.8%, a modest downtick from 0.9% in the previous month, but above the consensus of 0.6%. Food prices rose 0.7%, also a slight deceleration from the prior two months, but still more than 2.0 standard deviations above the mean since 1990. The latest increase was led by higher grocery prices. Energy prices rose 3.5%, led by gasoline. Together, food and energy account for more than 1/5 of the CPI and are among the most visible CPI components for consumers. As a result, they likely have an outsized impact on consumer inflation expectations, which have also moved up significantly this year.

Core CPI, which excludes food and energy, advanced 0.5%, in line with the consensus. Shelter, the biggest CPI component with about 1/3 of the weight, shot up 0.5%, the most since October 2005. Rent and owners’ equivalent rent each rose 0.4%, both nearly double their average monthly gain historically. Used and new vehicle prices continued to increase at fast rates, up 2.5% and 1.1%, respectively. There were also notable increases in household furnishings and operations (+0.8%), apparel (+1.3%), and air fares (+4.7%). In contrast, prices for vehicle insurance, recreation, and communication declined last month.