Despite some volatility, the Santa Claus Rally appears to be on track to lift the market into year-end. The S&P 500 extended its holiday-week rebound on Wednesday putting the index within an arm?s reach of the current all-time high. The question that needs to be asked, though, is what will the New Year bring?

The only certainty for the New Year is inflation. Inflation is running rampant through the economy and threatens to dampen consumption on many levels. The caveat for investors is that, until the market gives the signal for reversal, the trend in the market is up. If the S&P 500 can break out to a new high, we see it continuing upward at least until the Q4 earnings cycle gets underway.

Equities clawed back some of their recent losses on Tuesday with the major indices up more than 1.5% at the high of the session. The tech-heavy NASDAQ Composite led the move with a gain of more than 2.25% as fear of the Omicron variant subside. The risk of Omicron remains but any impact it may have on the economy may be getting priced into the market. The technical outlook for the S&P 500 remains bullish although volatility is expected to remain high.

Thursday will be the busiest day of trading for the week with more than a dozen economic reports due out before the Christmas Holiday. The key reading of the day will be the monthly income and spending data to include the PCE Price Index. The PCE Price Index is expected to accelerate on a MOM to and YOY basis and may come in hotter than the consensus estimate.

The market selloff gained momentum on Monday with the S&P 500 falling below the 30-day EMA and approaching the lowest levels in over two weeks. If the index continues to fall and breaks below the 4,500 level, a move down to 4,300 is the most likely scenario.

The selling is due to the combined impacts of COVID-19 and Joe Biden?s agenda falling apart. On the one hand, the Omicron variant threatens to bring the global supply chain to a standstill while on the other, Biden?s failure in getting his agenda through Congress is weighing on the GDP outlook. In both cases, the growth of S&P 500 earnings is in question and that is never a good thing for the stock market. If the market is forced to re-evaluate the outlook for S&P 500 earnings growth and lower the estimates the index could fall well below the 4,300 level as well.

Inflation is the dominant theme on Wall Street today. While COVID-19 issues linger, it is inflation that poses the most risk to the market. Last week, the PPI figure came in much hotter than expected at the headline, core, and YOY levels pointing to another increase in CPI down the road. With CPI already running well above 2.0% for going on 10 months, it is no wonder the FOMC finally decided to act. The risk for the market now is that inflation will continue to run hot for the next 2 - 3 months and force the FOMC to accelerate its timeline again.

This week will be all about the Santa Claus Rally and whether or not it will come. Traditionally the time between Christmas and New Year, the Santa Claus rally is never a foregone conclusion. What traders need to remember this week is that it is a holiday week, trading volume will be very light, and any move the market makes is subject to reversal at the drop of a hat.

Equities gave up some of their gains on Thursday with the tech-heavy NASDAQ Composite leading the way. The NASDAQ index fell more than 2.5% at the low of the day as investors weigh the impact of an accelerated FOMC rate-hike timeline on a sector laden with debt. The S&P 500 fell a smaller 1.0% at the low of the day while the blue-chip Dow Jones Industrial Average tried to post a small gain.

In regards to the FOMC and the timing of interest rate hikes, the Fed did not comment on how long after the taper ends it will wait to raise rates. If the Fed waits until May like the market is expecting that will mean 13 months of rising inflation and inflation well above the 2.0% mark. If the inflation trends don?t change and the Fed does wait until May we expect the first hike to be worth 2 to 3 0.25 increases.

Stocks got a boost from the Federal Reserve on Wednesday when it released its policy statement. In the
statement, the FOMC says it will aggressively dial back its bond purchasing program because its dual mandate
of employment and inflation have been met. The FOMC is indicating three interest rate hikes by the end of 2022
which is in line with the market?s expectations. The risk now is that inflation won?t respond to the policy shift
and the FOMC will be forced to act even more aggressively than it is now indicating.?
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On the economic front, the November retail sales figures came in much weaker than expected and reflect the
rising problem of inflation. Retail sales came in at up 0.3% versus an expectation of up 0.5% but the data does
not account for the impacts of inflation. With CPI up 6.8% for the year, the volume of sales is actually down
with the difference in the Retail Sales data made up by higher prices.

Equities pulled back again on Tuesday following another round of hotter than expected inflation data. The PPI came in at 0.8% for the month, up 0.2% from October and 0.3% hotter than forecast. The figure is coupled with high core readings and the hottest YOY increases on record.

If there was any doubt the FOMC would be raising interest rates sooner than expected this news should lay those doubts to rest. The CME Fedwatch tool is pricing in a near 60% chance the first hike will come by May and a 70% chance for two .25% interest rate hikes by June so today?s FOMC meeting is more important than ever. The Fed is expected to accelerate the taper and move the timeline for rate hikes forward.

Equities pulled back on Monday on the combined fear of COVID-19 and the FOMC. On the COVID front, the UK confirmed its first death from the Omicron variant raising the stakes in terms of how badly the new strain may impact the global economy. On the FOMC front, traders are trying to handicap when the first interest rate hike will come and we think the right answer is sooner rather than later.

As it stands, there is a better than 50% chance the first hike will come by May. If the pace of inflation doesn?t slow over the next month or so the first hike could come as early as March. Trading on Tuesday will be greatly influenced by the Producer Price Index which is expected to moderate on a month-to-month basis but to remain high versus last year and well above the Fed?s 2.0% target.

The equities market, the fickle beast that it is, told us that weaker than expected job gains and higher than expected inflation are no deterrent to higher stock market prices. The S&P 500 jumped more than 3.0% by the end of the last week and it looks like the market will keep moving higher in the near term at least. The setup suggests, in fact, a fairly strong Santa Claus Rally is brewing and it will take the S&P 500 index up to new all-time highs if it comes.

This week traders will be on alert for a slew of economic reports that include the FOMC meeting on Wednesday. The FOMC is expecting to accelerate the taper and more the timeline for interest rate hikes forward. The current expectation is for the first interest rate hike to come by May, the risk for the market is that it may come even sooner than that. Regardless, May is only five months away.

Equities pulled back a little on Thursday as traders and investors braced for what could be a very hot CPI reading. The index is released today and is expected to show another year-over-year increase in consumer-level inflation that is well above the 2.0% mark. The data will influence the FOMC at their meeting next week and could result in a much faster than expected taper. More importantly, the data will shed new light on when the first FOMC rate hike will come and we think that will be in early Spring at the latest.

Next week we?ll get a slew of data including housing, retail sales, and the Producer Price Index which is also expected to show hot inflation. With earnings on the back burner, the inflation data and FOMC meeting are what will influence trading for the week.