Why the Stock Market is Pulling Back to Start December

The stock market has pulled back to start December. As we are all winding down the year and preparing for the holiday season, the stock market has been trudging along slowly.

During the 5 trading days this month, the S&P 500 is down ~2.3%.

Not the worst return but given the positive returns of the past two months not a welcome sign either.

So, what is causing this pullback?

• Year End Activity
• Uncertainty About the Fed
• Lower Economic Outlook

Year End Activity

There is always a lot of money in motion at this time of the year.

Retirees are scrambling to take their required distributions.

Families may be dipping into their portfolios to afford the holidays.

Advisors are rebalancing portfolios and harvesting losses to lessen their clients tax burdens.

In all of these scenarios, money is leaving the markets. The good thing is that in many cases it’s leaving because it has to, not because investors are scared.

Retirees have to take money out of their accounts if they are 72 or older.

Advisors practicing tax loss harvesting are saving their clients’ money in the long run, giving them more to invest. So, while sell orders may be higher right now, more often than not that money is placed back into the market in a few days to begin growing again.

Finally, given high inflation and poor market returns people may be more likely to dip into their portfolios this year to enjoy the Christmas holiday. This is not ideal, but it is far from the worst-case scenario.

Fed Uncertainty

While the Federal Reserve may have been 6 months too late in confronting inflation, they are doing a good job of beginning to control the situation.

We get the next inflation report next week and many economists are predicting a favorable result.

This is important because the Fed may be able to slow the pace of interest rate increases as inflation normalizes. This bodes well for the stock market.

The Fed may also be able to pivot from their hard money stance sooner in 2023 than expected.

Once they begin loosening the strings on the economy more money will flow into investments and help pick up portfolios that have been dragging.

Over the next two years this could help propel the market to new highs.

Lower Economic Outlook

A huge factor at play in the health of the overall economy are jobs and the unemployment rate.

As of now we are unsure if the Fed will be able to achieve its “soft landing” or if it will tip us into a recession. We may actually already be in a recession, but we still will not know for a few more months.

How unemployment reacts to the increased rates in the economy will be one of the biggest determining factors. If people stay employed and the unemployment rate stays relatively stable, we will avoid a major recession.

If it increases dramatically, we may be hit harder yet.

I am in the camp that sees a soft landing a bit more likely, even though the Fed missed curtailing inflation by half a year.

They have done a good job of tightening the economy at a good pace and slowly bringing it down.

The goal now is to not do too much and increase rates where we will be tipped into a recession.

All in all, we still have a little way to go but for the most part I see brighter days on the horizon.

Do not let this short-term market hiccup curtail your investment approach. Use it as an opportunity to rebalance your portfolio, harvest some losses to lower your tax burden, and commit to your long-term strategy.

What do you think is causing the December drop?