Stocks Tank As The Santa Rally Melts Away

 | Jan 06, 2022 12:29AM ET

As expected, stocks fell sharply Wednesday, erasing nearly all of the Santa Rally in the NASDAQ and about half of it in the S&P 500. I guess nobody read the Wall Street Journal story from Tuesday. It was, like I said, a warning message that the language in the Fed minutes would be strong around the balance sheet reduction, and that it was.

So now, the Fed wants to end QE early, wants to raise rates sooner, AND reduce the balance sheet. The market cannot be ok with this, nor should it be. Valuations across the market are too high to support this much monetary tightening. If stocks were to start going back up again, it simply gives the Fed the green light to do what it wants; in a sense, by going higher, it is only making everything worse for itself.

Better still, on Jan. 11, Powell has his confirmation hearing before the Senate. It is unlikely that we hear a Powell that pulls back on his reins, considering as of yesterday, the S&P 500 was in the same spot it was in on Dec. 15.

The S&P 500 could peel off 20% from here and still be at its March 2021 levels. It could drop 28% and return to the February 2020 levels. Do you think Powell is going to blink if the S&P 500 falls, say 15%, or even 20%? Probably not? It was easy for the Fed to save the markets in past market pullback cycles, but now with CPI over 6%, it is not that easy anymore.

h2 S&P 500/h2

Wednesday's decline created an issue for the S&P 500, as it fell by 1.94% and closed at 4,700. That was below all the highs before the Santa rally and below the Nov. 8 closing high of 4,701. It could easily fall to 4,560 by Jan. 12.