Expected "Santa Rally" Not Looking Likely As Fear Ramps Up

Asset Markets - Illustration of simplified zig zag chart.The expected "Santa Rally" is looking like it won't come to fruition as fear ramps up in the market, which has led investors to take a "risk off" approach.

Over the past few months, many of the market's frothiest stocks have taken an absolute beating. Some of the highest-flying stocks are now down 50, 60, 70 or even 80% from their highs.

The strength of the FAANG stocks was hiding much of the damage, though this has changed in recent weeks, as the likes of Facebook (now known as Meta) and others have succumbed to the selling as well.

A sense of panic crept into the markets over the past week, as a number of different factors - including Omicron and high inflation - resulted in investors heading for the hills. This led to some indiscriminate selling, especially in higher beta names.

Investors are also spooked as the Federal Reserve has suddenly turned more hawkish, even going as far as to remove the word "transitory" from their expectations for inflation.

High beta growth stocks have benefitted from a zero interest rate environment, and the prospect of rapidly increased interest rates have put a dampen on the party.

Couple that with the Omicron variant of COVID-19 and you have an environment where the prospects of a Santa Claus rally have suddenly reversed into full-blown fear.


This "risk off" environment has continued into this week, as cryptocurrencies have been sold off, with Bitcoin falling 20% in just one day as leveraged investors got liquidated.

As we've seen in the past, cryptocurrencies are susceptible to violent sell-offs, mainly due to the amount of leverage that many investors employ. You can go from swimming in money to liquidated in just one day in the world of cryptocurrency.


The problem that many investors face is that there doesn't seem to be any real positive catalysts around the corner.

Earnings season is largely behind us, and many earnings reports were less than rosy.

Interest rates will soon be increasing, and many consumers are feeling the pinch of inflation.

On top of all of that, the Omicron variant has suddenly raised the prospects of a slowing economic recovery, or perhaps even another recession.


The amount of fear in the markets has suddenly exploded, and it will be interesting to see how this translates going forward.

Filed under: General Knowledge

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